MANAGERIAL ECONOMICS

WHAT IS MANAGERIAL ECONOMICS ?

y As the name suggests, it is a combination

of two things:y Economics y Mangers/Management

y Economics : is the allocation of scarce

resources to alternative use so as to achieve maximum possible satisfaction.

y Management: in simple terms it means getting things done. It involves Planning, organizing, implementing, leading. y As a part of management, managers need to take decisions. y Effective management is one which takes right decisions at the right time.

y Managerial economics is applied economics.

it is the use of economics theory and methodology to solve practical decision problems. y Managerial Economics is the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management. y It applies the principles, techniques and concepts of economics to solve the managerial problems.

Definition of Managerial Economics:

Business Economics consists of the use of

economic modes of thought to analyse business situations. - McNair and Meriam y Business Economics (Managerial Economics) is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management." - Spencer and Seegelman.

Nature of Managerial Economics

y Is essentially microeconomic in nature y Is pragmatic (practical) y Belong to normative economics (what ought

to be) y Is conceptual in nature y Utilize some theories of macroeconomics y Is problem solving in nature

Scope of Managerial Economics

y 1. Theory of Demand y 2. Theory of Production y 3. Theory of Exchange or Price theory y 4.Theory of profit y 5.Theory of capital and investment y 6.Environmental Issues

Theory of Demand
y Demand analysis helps the management in

identifying factors that influence demand for the products of a firm. y Demand Theory studies the behavior of consumers and answers such questions as why do consumers buy a particular product, how much do they buy? What is the effect of income on their buying? What are the other factors that influence the demand?

Theory of Production
y This theory helps in determining the size of

a firm and the level of production. y It gives an idea as to under what conditions costs increase or decrease, what are the effects of substitution of one input by the other, what is the optimum level of production?

Theory of Exchange or Price Theory

y It explains how commodity prices are

determined under different market conditions. y It helps in determining the price policy of a firm.

Theory of Profit
y This deals with the profit planning and

profit management of a firm. y Profit is uncertain because it depends upon a lot of uncertain factors like demand for the product, competitors actions, prices of factors of production, etc.

Theory of Capital and Investment

y It deals with the selection of suitable

investment project, most efficient allocation of the capital, assessing the efficiency of capital, minimising the possibility of Undercapitalization or Over- Capitalization.

Environmental Issues
y Certain issues related to the social and

political environment of the business are also included in the scope of managerial economics because no business can operate in isolation and these environmental factors have a major influence on the working of the business.

Importance of Managerial Economics

y Every business organization aims at maximising

profits. y In order to achieve this, managers need to take right decisions at the right time. y Managerial economics affords tools to the manager with the help of which he can take these decisions and ensure profitability of the firm.

Role & functions of a managerial economics

y A managerial economist is an expert who advises business management in economic matters & problems faced by the business organisation. y Analysis of business environment- help in making corporate plan by forecasting the economic environment. y Analysis of internal factors- price determination, use of installed capacity, investment decisions, expansion y Economic intelligence- supply management with economic information of general interest so that it can be used in conferences & seminars. y Collected from government publication,RBI, trade & industry journals, newspaper. y Decision making y Pricing strategy- helps in setting the price ,analysis of price in different market.

Specific function & responsibilitiesy Sales forecasting y Market research y Economic analysis of competing firms y Pricing problem of industry y Evaluation of capital projects y Security/ investment analysis y Production & inventory control y Environmental forecasting y Advice on international trade & foreign exchange

management.