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Managerial Economics

P. SRINIVASAN
Faculty: Dept. of Economics
Christ University
Douglas - Managerial Economics is .. the application of
economic principles and methodologies to the decision-
making process within the firm or organization.

Pappas & Hirschey - Managerial Economics applies
economic theory and methods to business and
administrative decision-making.

Salvatore - Managerial Economics refers to the
application of economic theory and the tools of analysis
of decision science to examine how an organisation can
achieve its objectives most effectively.

What is Managerial Economics?
Definitions: Business Economics
Integration of Economic theory with business practice for
purpose of facilitating decision making and forward planning
by management
- Spencer & Siegelman

It is concerned with the application of economic concepts and
economics to the problems of formulating rational decision
making -Mansfield

It is the application of economic analysis to business problems;
it has its origin in theoretical microeconomics.
Howard Davies and Pun-Lee Lam -
Decision Problems faced by firms
What should be the price of the product?
What should be the size of the plant to
be installed?
How many workers should be
employed?
What is the optimal level of inventories
of finished products, raw material, spare
parts, etc.?
What should be the cost structure?

Relationship between Economics & Management
Economics theory
Business Management
Decision Problems
Optimal Solutions to
Business problems
Managerial Economics-
Application of Economics
to
solving business problems
Scope: Managerial Economics
Incorporate micro and macroeconomics to deal
with business problems
Microeconomics - micro means a small part
Concerned with analysis of behavior of
individual economic variables such as
individual consumer or a producer or price of
a particular commodity
Macroeconomics - concerned with aggregate
behavior of the economy as a whole


Microeconomics applied to (operational)
internal issues
Demand Analysis
Production and Supply analysis
Cost analysis
Analysis of market structure and Pricing Theory
Profit Analysis
Capital and Investment Decisions
Macroeconomics applied to external issues-
Economic Environment
Type of Economic system of a country
Study of Macro variables
Study related to foreign trade
Study of Government policies Monetary,
Fiscal
Scope: Managerial Economics
Goals of firms: There are economic, social, organizational,
and strategic goals.

Demand Analysis and Forecasting: Business firms has to
meet the requirement of consumers in the market. The basic
problems of what to produce where to produce, for whom to
produce, how to produce and how to distribute them in the
market are to be answered by a firm.

Production and Cost Analysis: Maximization of outputs is
one of the basic goals of a firm. Production analysis deals with
production function, laws of return, returns to scale, economies
of scale etc. Maximization of output with minimum cost is the
basic slogan of any firm.



Scope: Managerial Economics
Pricing Decisions, Policies and Practices: Pricing Decision
is related to fixing the prices of goods and services. This
depends on the pricing policy and practices adopted by a firm.
Price setting is one of the most important policies of a firm.
The amount of revenue, the level of income and above all the
volume of profit earned by a firm directly depend on its pricing
decisions.

Profit Management:-A firm is basically a commercial or
business unit. Consequently, the success or failure of it is
measured in terms of the amount of profit it is able to earn in a
competitive market. Under profit management, one has to
study various theories of profit, emergence of profit, functions
of profit and its measurement, etc.




Scope: Managerial Economics
Capital Management: It is another crucial area of business.
Success of any business depends on adequate capital
investment and its proper management. Under capital
management, one has to study capital requirement, methods
of capital mobilization, capital budgeting, optimal allocation of
capital, selection of highly profitable project cost, cost of
capital, return on capital, planning and control of capital
expenditure etc.

Linear Programming and Theory of Games: It offers actual
numerical solution to the problems of making optimum
choices. It involves either maximization of profits or
minimization of costs.





Scope: Managerial Economics
Strategic Planning: It provides a framework on which long
term decisions can be made which have an impact on the
behavior of the firm. The firm sets certain long term goals and
objectives and selects the strategy to achieve the same. It is
now a new addition to the scope of business economics with
the emergence of MNCs.

Market Structure and Conditions: The number of sellers
and buyers, the nature, extent and degree of competition etc.
determines the nature of policies to be adopted by a firm in the
market.




Importance of the Study of
Managerial Economics

It gives guidance for identification of key variables
in decision-making process.

It helps the business executives to become much
more responsive realistic and competent to face the
ever changing challenge in the modern business
world.

It helps a firm in forecasting the most important
economic variables like demand and supply, cost,
revenue, price, sales and profit etc.

Importance of the Study of Managerial
Economics
Integrating traditional theoretical concepts in
relation to the actual business behavior and
conditions

Formulating business policies and plans

It helps in the optimum use of scarce resources of a
firm to maximize its profits.


Role of a Managerial Economist
Study of Business organisation: Managerial
Economists analyses various internal factors, which are
within the control of the firm that influence the
business. These issues are related to price and output
decisions, investment decisions, expansion of the size
of the firm, quality control programmes, arranging
finance from various sources and selection of
appropriate pricing policy.

Study of Externalities: Managerial Economist has to
analyse the external factors that influence firms
decisions. External factors include trends in national
income, business cycles, fiscal policy and international
trade.


Role of a Managerial Economist

Specific Role: Managerial Economist conducts market
research and surveys in order to monitor the market
share, consumer preferences, demand, etc. and make
recommendations to the firm.

Provide Economic Information: Managerial
Economist has to collect data regarding rival products,
market potential, demand changes, sales trends, tax
policy etc., and make use of these data in firms decision
making process.

Role of a Managerial Economist

In addition, a Managerial economist has the following responsibilities:

o *Forecasting of demand
o *Preparation of sales targets.
o *Forecasting change in costs and business conditions based on market
research
o *Conducting market survey to decide the nature of competition existing in
the market.
o *Understanding various issues and problems faced by the industry.
o *Assisting in business planning
o *Discovering new possibilities for business firm
o *Advising on price and investment decisions of the firm.
o *Evaluating the project.
o *Building micro economic and macro economic models of firms
behaviour.
o *Briefing the management on contemporary issues related to domestic
and global economy.