MANAGERIAL ECONOMICS The origin of the term economics lies in the Greek words Oikon and Nomos, means

Laws of households. So the significance of economics to households. Economics as a social science which covers the action of individuals and grou s of individuals in the rocess of roducing, e!changing and consuming of goods and services. Economics is classified into " microeconomics and macroeconomics. These words are derived from the Greek words mikros and makros which means small and large res ectivel#. $anagerial Economics is considered to %e a lied microeconomics. Economics contri%utes a great deal towards the erformance of managerial duties and res onsi%ilities. The %asic function of the managers is to achieve the o%&ectives of the firm. Economics is the stud# of logic, tools and techni'ues of making o timum use of the availa%le resources to achieve the given ends. $anagers are essentiall#, racticing economics. (E)*N*T*ON *t is defined as +a lication of economics conce t , anal#sis to the ro%lems of formulating rational managerial decision-. a. / lication of Economic conce t , anal#sis means economic theories and rinci les. %. 0ro%lem of formulating means trade ractice ma# create a ro%lem for those com anies whose o%&ectives are somewhat different from trade ractices. To outcome with that ro%lem we have theories and rinci le. c. 1ational managerial decision means a com an# can take rational decision using economic theories and rinci les. Nature of the Managerial Economics a. $anagerial economics is micro2economic in character. $anagerial economics does not deal with the entire econom# as a unit of stud#. %. $anagerial economics is ractical. *t involves com lications ignored in economic thor# to face the overall situation in which decisions are made. $anagerial economics considers the articulars environment of decision2making. c. $anagerial economics largel# uses that %od# of economic conce ts and rinci les which is known as Theor# of the )irm or Economics of the )irm. d. $anagerial economics %elongs to normative economics, *t is concerned with what decisions ought to %e made and hence involves value &udgements. *t tells what aims and o%&ectives a firm should ursue and these having %een defined, it tells how %est to achieve these aims in articular situations.

e. $anagers and entre reneurs now a da#s make it their %usiness to have a good working knowledge of macro economics.

Scope of managerial economics $icro economics and micro economics are a lied to %usiness anal#sis and decision making directl# or indirectl#. $anagerial economics com rises, therefore, %oth micro and macro economic theories. The sco e of managerial economics is economics a lied to the anal#sis of %usiness ro%lems and decision making, it is a lied economics. 3. Demand Analysis " / ma&or art of managerial decision2making de ends on accurate estimates of demand. (emand anal#sis includes demand determinants, demand distinctions and demand forecasting. (emand anal#sis is essential for %usiness lanning and occu ies a strategic lace in managerial economics. 4. Supply Analysis " *m ortant as ects of su l# anal#sis are5 su l# schedule, curves functions, law and elasticit# of su l# and factors influencing su l#. 6. Cost Analysis " 7ost anal#sis includes, cost conce ts and classifications, cost out ut relationshi s, economies and diseconomies of scale and cost control and cost reduction. 8. ricing Decisions " *n managerial economics, ricing is a ver# im ortant area. The success of a %usiness firm largel# de ends on the correctness of the rice decisions taken %# it. 0ricing decisions consider rice determination in various market firms, ricing methods, differential ricing, roduct line ricing and rice forecasting. 9. rofit " The im ortant as ects covered under this area are nature and measurement of rofit, rofit olicies and techni'ues of rofit lanning like :reak2 even anal#sis. ;. Capital Management " The most com le! for the %usiness manager are likel# to %e those relating to the firms ca ital investments. 7a ital management im lies and control of ca ital e! enditure. 7a ital management covered cost of ca ital, rate of return and selection of ro&ects.

MANAGERIAL ECONOMICS IN DECISION MA!ING The rime function of a management e!ecutive in a %usiness organi<ation is decision2making. (ecision making means the rocess of selecting one action from two or more alternative courses of action. The decision making function %ecomes one of making choices that will rovide the most efficient means of attaining a desired end, rofit ma!imi<ation. Once a decision is made a%out the articular goal

to %e achieved, lans as to roduction, ricing, ca ital, raw materials, la%ours etc. are re ared. / manager has to take a num%er of decisions in conformit# with the goals of the firm. $an# %usiness decisions are taken under the condition of uncertainit# and therefore involve risk. =ncertainit# and risk arise mainl# %ecause %ecause of demand and su l#, changing %usiness environment, government olic#, social and olitical changes in the countr#. The degree of uncertainit# and risk can %e greatl# reduced if market conditions could %e redicted with a high degree of relia%ilit#. >hat is e'uall# im ortant is to take a ro riate %usiness decision and to formulate %usiness strateg# conforming to the goals of the firm.

Objectives and Uses (importance) of managerial Economics Objectives: The basic objective of managerial economics is to analyze the economic problems faced by the business. The other objectives are: 1. To integrate economic theory with business practice. 2. To apply economic concepts and principles to solve business problems. 3. To allocate the scares resources in the optimal manner. 4. To ma e all!round development of a firm. ". To minimize ris and uncertainty #. To helps in demand and sales forecasting. $. To help in profit ma%imization. &. To help to achieve the other objectives of the firm li e industry leadership' e%pansion implementation of policies etc... Importance: (n order to solve the problems of decision ma ing' data are to be collected and analyzed in the light of business objectives. )anagerial economics provides help in this area. The importance of managerial economics maybe relies in the following points: 1. (t provides tool and techni*ues for managerial decision ma ing. 2. (t gives answers to the basic problems of business management. 3. (t supplies data for analysis and forecasting. 4. (t provides tools for demand forecasting and profit planning. ". (t guides the managerial economist. #. (t helps in formulating business policies. $. (t assists the management to now internal and e%ternal factors influence the business. +ollowing are the important areas of decision ma ing, a- .election of product. b- .election of suitable product mi%. c- .election of method of production. d- /roduct line decision. e- 0etermination of price and *uantity. f- 0ecision on promotional strategy. g- 1ptimum input combination. h- 2llocation of resources. i- 3eplacement decision. j- )a e or buy decision. - .hut down decision.

l- 0ecision on e%port and import. m- 4ocation decision. n- 5apital budgeting.

1. What is production possibilit frontier! 2ns :! (t is a boundary line which shows that ma%imum combination of two goods which can be produced with the help of given resources and technology at a given period of time.

The Production Possibility Frontier (PPF) or Production Possibility Curve (PPC) is the graphical expression of both the concepts of limitation of resource and opportunity cost. It shows the maximum amounts of production that can be obtained by an economy. ssuming that the technological !nowledge and "uantity of input is fixed and the economy operates at its# level of productive efficiency$).

In a very simple sense% the graph that depicts opportunity cost between any two given items (gun and butter)produced by an imaginary economy is !nown in economics as the &PPC# or &PPF#.

Gun (thousands)

lternative Production Possibilities Possibilities 'utter ) ' C 0 F $ , . + * (un $* $+ $, / * )

16 14 12 10 8 6 4 2 0 0

+
"

"

C
"

"

, D
" "

Outside the PPF (inability/ scarcity/ resource constrained/ impossible/unobtainable)

G
Inside the PPF (inefficient/ unemployed/under utilization points)
1 2 3

E
"

"

$
4
" 5

"

Butte r (m illion pounds )

$icroeconomics$acroeconomics"#$igure% &he (

roduction

ossi'ility $rontier

$) sho*s the schedule of choices along *hich society can choose to su'stitute guns for 'utter

/ stud# of individual economic units and their economic %ehavior./ stud# of the economic s#stem as a whole.4.$icroeconomics focuses on su l# and demand and other forces that determine rice levels for s ecific com anies in s ecific industr# sectors.$acroeconomics looks at econom#2wide henomena such as Gross domestic roduct ?G(0. and how it is affected %# changes in unem lo#ment, national income, rate of growth, and rice levels.6.$icroeconomics takes a %ottoms2 u a roach to anal#<ing the econom# while macroeconomics. $acroeconomics takes a to 2down a roach to anal#<ing the econom# while macroeconomics. 8.This is often called as 0rice Theor#.This is often dcalled as Theor# of *ncome and Em lo#ment.9.This laces em hasis on the functioning of roduct and resource markets.This laces em hasis on the %road macroeconomic aggregates and their evaluation.;.This studies individual income, out ut level in individual sectors etc.This is concerned with national income and national out ut.@.This ma# not concern itself with the interrelationshi s %etween various economic units.This concerns itself with the interrelationshi s %etween various economic units and their im act on the econom# as a whole.A.This views individual economic units in isolation with each other.This does not view individual economic units in isolation with each other %ut as arts of a whole s#stem.

CIRC-LAR $LO. O$ ECONOM/

 / household is a erson or a grou of eo le that share their income. / firm is an organi<ation that roduces goods and services for sale. )irms sell goods and services that the# roduce to households in markets for goods and services. )irms %u# the resources the# need to roduceBfactors of roductionB in factor markets.

01*N7*0LES O) E7ONO$*7S

"# eople $ace &radeoffs

To get one thing, we usuall# have to give u something else E!. Leisure time vs. work

0# &he Cost of Something is .hat /ou Gi1e -p to Get It

ortunit# cost is the second %est alternative foregone.

E!. The o ortunit# cost of going to college is the mone# #ou could have earned if #ou used that time to work. eople &hin3 at the Margin

2# Rational

$arginal changes are small, incremental changes to an e!isting lan of action

E!. (eciding to roduce one more encil or not

0eo le will onl# take action of the marginal %enefit e!ceed the marginal cost

4# eople Respond to Incenti1es

*ncentive is something that causes a erson to act. :ecause eo le use cost and %enefit anal#sis, the# also res ond to incentives

E!. Cigher ta!es on cigarettes to revent smoking

5# &rade Can Ma3e E1eryone +etter Off

Trade allows countries to s eciali<e according to their com arative advantages and to en&o# a greater variet# of goods and services

6# Mar3ets Are -sually a Good .ay to Organi7e Economic Acti1ity

/dam Smith made the o%servation that when households and firms interact in markets guided %# the invisi%le hand, the# will roduce the most sur luses for the econom#

8# Go1ernments Can Sometimes Impro1e Economic Outcomes

$arket failures occur when the market fails to allocate resources efficientl#. Governments can ste in and intervene in order to romote efficienc# and e'uit#. roduction

9# &he Standard of Li1ing Depends on a Country:s

The more goods and services roduced in a countr#, the higher the standard of living. /s eo le consume a larger 'uantit# of goods and services, their standard of living will increase rints &oo Much Money

;# rices Rise .hen the Go1ernment

>hen too much mone# is floating in the econom#, there will %e higher demand for goods and services. This will cause firms to increase their rice in the long run causing inflation.

"<# Society $aces a Short=Run &radeoff +et*een Inflation and -nemployment

*n the short run, when rices increase, su liers will want to increase their roduction of goods and services. *n order to achieve this, the# need to hire more workers to roduce those goods and services. $ore hiring means lower unem lo#ment while there is still inflation. Cowever, this is not the case in the long2run.

#"$"%E&I"' E(O$O#I() * #"(&O + #I(&O a) #icroeconomics is an area of economics that evaluates ho, individuals- households- and firms ,ithin the large economic s stem ma.e decisions to allocate limited resources to fulfill unlimited ,ants. It encompasses the stud of behavior of individual economic units ,ithin the ,hole economic s stem. It places primar emphasis on the nature and functions of product mar.ets- and includes the stud of factor mar.ets and of the role of government in promoting greater efficienc and e/uit in the econom . b) #acroeconomics on the other hand- involves the stud of sum total of economic activit as result of the functioning of the entire economic s stem. When individual economic units interact and perform the create the economic s stem as a ,hole. 0his s stem acts as both a result as ,ell as a cause of economic behavior and decisions of individual economic units. 0his stud places particular emphasis on national income and macroeconimc aggrgatesand also develops economic performance measures- economic gro,th- and international economics. c) 1ollo,ing table distinguishes bet,een the #icro and #acro economicsd. S.N.