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INTRODUCTION TO MANAGERIALINTRODUCTION TO MANAGERIAL
ECONOMICSECONOMICS
PROF. V. R . KISHORE KUMAR,
M.A .E. MPhil.
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INDEX Introduction
Definition of Economics and Managerial Economics
Scope of Managerial Economics
Basic Economic Problems
The Firm
Role of a Managerial Economist
Decision making areas
Steps in decision making References
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Emergence of managerial economics as a separate curse of
management studies can be attributed to at least three factors
b) Growing complexity of business decision making process
due to changing market conditions and business
environment
c) The increasing use of economic logic, conceptual theories
and tools of economic analysis in the process of business
decision making process
d) Rapid increase in demand for professionally trained
managerial manpower
INTRODUCTION
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DFINITIONS OF ECONOMICS AND
MANAGERIAL ECONOMICS
ECONOMICS: Economics is a social science . Its basicfunction is to study how people individual households, firms and nations maximizing their gains fromtheir limited resources and opportunities.
In economic terminology it is called as maximizingbehaviour or more approximately optimizingbehaviour .
Optimization means selecting best out of availableresources with the objective of maximizing gains fromgiven resources.
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Economics is thus a social science, which studies
human behaviour in relation to optimizingallocation 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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The origin of the subject could be traced from the works of the
Greek philosopherAristotle who confined the study of
economics to household management and acquiring, guarding
and making proper use of wealth.
The term economics is derived from two Greek words
OIKOS(a house) and NEMEIN(to manage).
Prof. Samuleson remarks economics as the oldest of arts and
newest of science, indeed the queen of the social science.
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Definitions of Economics:
Wealth Definition- Adam Smith, J.B.Say, J.S.Mill
etc.(Classical definition)
Welfare Definition- Marshall, A.C.Pigue etc.(Neoclassical
definition)
Scarcity definition- Robbins
Growth Definition- Paul A Samuelson Moderndefinition
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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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Mansfield : He defines that managerial economics is
concerned with the application of economic
concepts and economic tools to the problems of
formulating rational decision making.
Spencer and Seigleman : It is the integration of
economic theory with business practice for the
purpose of facilitating decision making and
forward planning by management
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Scope of Managerial Economics
Economics has two major branches
1. Micro Economics
2. Macro Economics
The term Micro means small and Macro means
big.Both are applied to business directly or indirectly.
managerial economics comprises both micro and
macro economic theories. The parts of micro andmacro economics that constitute managerial economics
depend on the purpose of analysis.
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The scope of M.E. comprises all theeconomic concepts, theories and tools of
analysis which can be used for analysethe issues related to demand ,
production and cost, market structure
etc.,In other words managerial economics is
economics applied to analysis ofbusiness problems and decision making. Broadly it is applied economics
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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 ProductionAnalysis of Market Structure and Pricing
Theory
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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
Governments 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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THE FIRM
Meaning :
The basic unit for obtaining production which
performs crucial role of linking product, factor and
money markets.
It is an administrative organization, utilising a pool
of resources.
A business organization under a single management
with one or more establishments.
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FIRMS,INPUTS AND
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DECISION MAKING AREAS
Business decision making is influenced not only byeconomic 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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The following types of cost are useful in the
decision areas
Average, Marginal and Total Costs
Fixed and Variable Cost
Direct and Indirect Cost
Replacement and Original Cost
Opportunity and Industrial CostSunk Cost and Outlay Cost
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STUDY OF ECONOMIC ENVIORNMENT
Economic environment is the most significant
component of the business environment. It affects thesurvival and success of a business organization.
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PRICING AND RELATED DECISIONS
The Price-output decisions are taken under various market
structures. The structure of the market refers to the degree
of competition in the market for the firms goods and
services.
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INVESTMENT DECISION
Business firms invest large money in their
projects. Therefore, capital expenditure for
different project proposals compete within
themselves for their claim on scarce resources.
Generally , in business sector itself, individual
firms compete against access to financial
resources and scares .
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The investment decisions are important as
vNot easily reversible
vGenerally involves large sums of money
vHighly futuristic and future is full of uncertainty
vLong gestation periods
Thus, careful financial appraisal of each project
involves larger investments. Due to above reasons,
capital decisions fall in the category of investment and
known as capital budgeting decisions made by
highest level of management.
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STEPS IN DECISION MAKINGManagerial economics is concerned with decision
making at the level of firm. These decisions have far
reaching effects on the firm. Delay in taking decisions
or implementing decisions might turn in to losses.
Various steps in the decision making by a business firm
are as fallows :
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REFERENCES
3. MANAGERIAL ECONOMICS --D.N.DWIVEDI
2. BUSINESS ECONOMICS --
D.D. CHATURVEDIS.L. GUPTASUMITRA PAUL
11. MICRO ECONOMICS --
JHON KENNADY14.MANGERIAL ECONOMICS
MITHANI
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THANK YOU