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Managerial Economics

Unit-I
Introduction to economicsThe term Economics is derived from the two Greek words, OIKOU and NOMOS; meaning the rule or law of household. It originally dealt with the way in which a prudent household might best make the most efficient use of the limited income. The concept of efficient use of resources of the family was later carried over to society as a whole. In broader sense, economics analysis how a society utilizes its scarce resources of manpower, raw materials and capital to satisfy the material wants of its members. Example- What determines how much steel and manpower are devoted to the production of automobiles and how much to the output of tin cans or refrigerators. In day to day events we come across several economic problems like change in price of individual commodities (goods) as well as general price level changes; the economic prosperity and well-being are reflected by higher standards of living of some people despite general poverty of the masses in India. DEFINTION of ECONOMICS It can be defined as social science concerned with the proper uses and allocation of resources for the achievement and maintenance of growth with stability. Economics deals with the laws and principles which govern the functioning of an economy and its various parts. An economy exists because of two basic facts1) Human wants for goods and services are unlimited. 2) Productive resources with which to produce goods and services are scarce There are four fundamental problems with which the economics deals witha) b) c) d) What to produce How to produce For whom to produce Are the resources economically used?

A) What to produce-This problem calls for deciding which goods to produce and in what quantities. The problem arises because of the scarcity of resources. For example- the case of BATA INDIA LIMITED, since the resources (leather, capital, labour etc.) are scarce or limited, the company has to decide whether it has to produce shoes, sandals or chappals or combination of these and also what quantities of the selected goods should be produced.

b) How to produce- What combination of resources and technology should be used for producing the goods which have been decided on in response to first problem. In the above example, shoes can be produced by cobblers or produced by machines. Different technologies require different combination of resources. c) For whom to produce- Economy has to decide who should get how much of the total amount of goods and services produced. d) Are the resources economically used? - This is the problem of economic efficiency. There is to be no waste or misuse of resources since they are limited. Basic terms in economics1) Goods- Anything that can satisfy human wants is called goods in economics.While services also satisfy human wants, the difference is that good are tangible but services are not.(intangible). Goods can be of various types. They can be free or economic, consumer or producer, transferable or non-transferable and so on. 2) Utility- The want satisfying quality of a good is known as utility. Utility of good changes with certain conditions and circumstances. 3) Value- the value of a good denotes the goods/services that we can have in exchange for it. For a good to have value, besides possessing utility, it should also be scarce & transferable. 4) Wealth- Anything that has value is called wealth. In economics wealth does not refer to money, but to all goods that have value. 5) Income- The amount of money that wealth yields is known as income. Example- A man who owns a car and runs it as a taxi. The car is worth Rs.4 lakh and the man earns Rs 10000 per month from the taxi operation. Here Rs 4lakh is the wealth and Rs 10000 per month is the income. Economics can be broadly divided into two categories1) Microeconomics 2) Macroeconomics Microeconomics- Micro stands for just a small part of the whole or individualistic. It is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities. Macroeconomics- It is aggregative economics wherein the overall conditions of the economy such as total production, total consumption, total saving and total investment are studied. Example- National Income, employment and economic growth. It is thus a branch of economics which deals with the aggregate behavior of the economy as a whole.

DIFFERENCE between Micro economics and macroeconomics MICROECONOMICS 1) Study of the behavior of individual units. 2) It is individualistic 3) It is concerned with behavior of micro variables. 4) Deals with problems of pricing and income distribution. MACROECONOMICS 1) Study of behavior of economy as a whole. 2) It is aggregative in approach. 3) It is concerned with behavior of macro variables. 4) It pertains to the problems of the size of national income, economic growth & general price level.

MANAGERIAL ECONOMICS
INTRODUCTIONThe role of managerial economics or business economics is very wide. In fact no business can run without an economic background. Managerial economics is that applied aspect of economics which studies a business firm and helps the management in decision making for tackling the problems of the firm. Managerial economics is the discipline that deals with the application of economic concepts, theories and methodologies to the practical problems of business/forms in order to formulate rational managerial decisions for solving those problems. The basic economic concepts of demand, cost, production and price, along with the theories of consumer behavior, profit maximization and market structures help in finding out optimal solutions. The subject that uses the theories of economics and the methodologies of the decision sciences for managerial decision-making is known as managerial economics.

DEFINITIONSAccording to Spencer and SiegelmanBusiness economics is the integration of economic theory and business practices for the purpose of facilitating decision making and forward planning by management.

According to Prof. Joel DeanThe purpose of managerial economics is to show how economic analysis can be used in formulating business policies. According to Davis and ChangManagerial economics applies to the principle and methods of economics to the problems faced by management of business, or other types of organization and to help find solutions that advance the best interests of such organization. Managerial economics is the science of directing scarce resources to manage cost effectively. It applies to businesses such as decision in relation to customers including pricing and advertising, supplies, competitors or the internal workings of the organization. 1- It studies the individual economic behavior where resources are costly. Example, consumers respond to changes in prices and income; how business decides on employment and sales. 2- It studies the aggregate economic variables directly. Example- issues related to interest and exchange rates, inflation, import and export policies. How is Managerial Economics Useful?(Significance) a) Evaluating Choice alternatives- Managerial economics links economic concepts with quantitative methods to develop vital tools for managerial decision making. i) Managerial economics identifies ways to efficiently achieve goals. ii) It can be used to specify pricing and production strategies. iii) It provides production and marketing rules to help maximize net profits. b) Making the Best Decisions- To establish appropriate decision rules, managers must understand the economic environment in which they operate. c) It makes problem solving easy in business. d) It improves the quality and preciseness of decision. e) It helps in arising at quick and appropriate decision

Nature of Managerial Economics


1) 2) 3) 4) It is concerned with business. It involves identification of the problems and decision to be made. A statement of alternative solution to the problems. A determination of what data is relevant to the decisions and an analysis of that data relative to the alternative solutions. 5) Choosing the best solution consistent with our firms or agencys objectives. 6) It is essentially microeconomic in nature. 7) Utilizes some theories of macroeconomics.

Scope of Managerial economics


Scope of managerial economics according to the theories1) Demand theory: a) estimation of future sales is essential before preparing production schedule and employing productive resources. b) The study of behavior of consumers is also essential. It tries to find out why consumer buys a particular product. 2) Theory of Production: Production and cost analysis is important for smooth functioning of production process and project planning. Following are the decisions taken under this theorya) Planning of production schedule b) Deciding the input combination. c) Estimation of cost of production. d) Analysis of cost of production. 3) Theory of Price: It explains how the prices are determined under different types of market conditions. Success of a business and industrial firm depends upon the accuracy and correctness of pricing decisions taken by it. Under this two decisions are important-a) determination of price of product; b) Analysis of price of product. 4) Theory of Profit: A business works for the profit; it is the objective of an organization to maximize the profits. It is the difference between total revenue and total cost. Because of the following factors profit is uncertain i) Demand of the product. ii) Prices of the factors of Production. iii) Nature and degree of competition in the market. iv) Price behavior under changing conditions. 5) Theory of Capital and Investment: For a business, it is essential to decide the optimum capital and investment. For this purpose, theory of capital & investment is employed which address the issues related to a) Selection of most suitable investment project; b) Most efficient allocation of capital; c) Assessing efficiency of capital; d) Planning and control of capital expenditure.

Scope of Managerial economics in engineering perspectiveThe scope of economics in engineering is many and varied1) It has wide scope in manufacturing, construction, mining and other engineering industries. Example of economic application are as follows: A) Selection of location and site for a new plant. B) Production planning and control C) Selection of equipment and their replacement analysis. D) Selection of material handling system. 2) Better decision making on the part of engineers. 3) Efficient use of resources results in better output and economic advancement. 4) Cost of production is reduced. 5) Alternative courses of action using economic principles may result in reduction of prices of goods and services. 6) Elimination of waste can result in application of engineering economics or managerial economics. 7) More capital will be made available for investment and growth. 8) Improves the standard of living with the result of better products, more wages and salaries, more output, etc. from the firm applying managerial economics.

Meaning of Science, Engineering and TechnologyScience, engineering and technology are the most important factors for transforming a traditional society into a modern and developed one. Definition of engineering- It is the discipline, art, skill and profession of acquiring and applying scientific, mathematical, economic, social and practical knowledge in order to design and build structures, machines,devices,systems,materials and processes that safely realize improvements to the lives of people. Definition of Technology- It is making usage & knowledge of tools, techniques, crafts, systems or methods of organization in order to solve a problem or serve some purpose. It affects humans as well as animal species ability to control and adapt to their natural environments. In many societies technology has helped develop more advanced economies and has allowed the rise of a leisure class.

From the above definitions we can say that engineering is the, applied science and technology is the applied engineering. This clearly shows that social, economic and scientific factors for development are highly interrelated. Technology arising from scientific research followed by technological development has been a prime mover in creating the kind of world in which we live today. Discovery of natural laws through scientific research has given a new dimension to technology.

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