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Introduction

Managerial Economics

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Definition Nature & Scope Relevance Importance Scarcity & Choice Market Economy Production Possibility Curve Economics & Business

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 Economics- As Social Science that deals with the production, distribution & consumption of scarce resources in an economy. It explains how day-to-day economic activities such as spending money, making purchases take place in an individuals life. Prof. Robinson defines:- A Science which studies human behavior as a relationship between ends & scarce which have alternative uses. Economics is concerned with the best possible use of limited resources- Robbins

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 Economics can be viewed as a science or as an art. To understand Nature of Economics, Science can be defined as a systematic body of knowledge that explains the relationships b\w cause & effect. Money is used as a measuring rod for organizational & individual economic activities. Economics often has to deal with human attitudes and emotions which are difficult to predict
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 As Economics deals with the wants, needs and demand of human beings, it is defined as art. J.M.Keynes defined art as a system of rules for the attainment of a given end.

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Nature of Economics whether it is a Positive or Normative.

Positive Science: Body of systematized knowledge concerning what is. Normative Science: Body of systematized knowledge relating to the criteria of what ought to be and concerned with the ideal as distinguished from the actual. Study of economics to understand the nature & causes of economic problems which arise due to unlimited human wants & limited resources.

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 Economics helps us to answer 1 What to produce? 2 How to Produce? 3 For whom to produce? About how society allocates its resources How the economy works How businesses & government make decisions How these decisions affect the individual

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Economics:
Micro economics: Study of economic system from the perspective of households & business firms; It focuses on the nature of individual consumption & production units within particular market. Micro stands for millionth part or just a small part of the whole.

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Microeconomics
To analyze the behavior of consumers, producers & markets. Price: To determine what goods & services are produced, what goods & services are produced, how they are produced, for whom they are produced. Price play a crucial role in decision making & play an important role and also called as Price Theory. Product Pricing Consumer behavior Economic conditions of a section of the people Location of an industry

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Macro economics: Deals with over all performance of the economic system; focuses on issues like unemployment, inflation, economic growth etc. It is aggregative economics wherein the overall conditions of the economy such as total production; total consumption, total saving and total investment are studied.

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It includes: National income and output General price level Balance of trade and payments External value of money Saving and investment Employment & economic growth

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Managerial Economics: Integration of economic

theory with business practice. Tools: Demand, Supply, Price, Competition etc

OR
ME refers to the integration of economic theory with business practice for the purpose of facilitating decisionmaking & forward planning by mgmt. Therefore ME is defined as the discipline which deals with the application of economic theory to business mgmt.

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 ME is the process of application of the principles, techniques and concepts of economics to solve the managerial problems of business and industrial enterprises. It is also known as Economics of Enterprise, Applied Economics, and Managerial Analysis It takes up the concepts of business accounting, money costs, revenues, profit etc It takes up the concepts of business accounting, money costs, revenues, profit etc

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 ME is the process of application of the principles, techniques and concepts of economics to solve the managerial problems of business and industrial enterprises. It is also known as Economics of Enterprise, Applied Economics, and Managerial Analysis. ME is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management- Spencer & Siegel man.

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Applications:
Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and conditions. Estimating economic relationships- used for forecasting. Predicting relevant economic qualities e.g., profit, demand, productions, costs, pricing, capital etc. Decision making, forward planning, future pertaining to profit, prices, costs, capital Significant external forces for business operations like business cycles, fluctuations in national income & govt policies pertaining to taxation, foreign trade etc.
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Characteristics:
Is micro-economic in nature Is pragmatic Is Prescriptive: Is conceptual in Nature Provides an intelligent understanding of environment in which business must operate. Is problem solving in nature A Scientific Art:

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 Micro-economic in nature: Micro-economics is concerned with smaller parts of the economy such as a firm. ME falls in Micro-economics as it is concerned with the problems of the individual business firms. Prescriptive: ME suggest the application of economic principled as regards policy formulation, decisionmaking and future-planning. A Scientific Art: an art is a system of rules for the attainment of given ends. ME may be also called an art, because it helps the management in the efficient utilization of scarce economic resources. It considers production costs, demand, price, profit, risk etc and helps the mgmt in selecting the best alternative.

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 Is Pragmatic: ME is a practical subject. It goes beyond providing rigid and abstract theoretical frameworks for mangers. It incorporates complications ignored by economic theory in order to analyze the overall situation in which managerial decision making takes place. Is microeconomic in nature: sine ME is concerned with the analysis of and finding optimal solutions to decision making problems of business/firms. Is conceptual in nature: ME is based on a sound frame work of economic concepts. Its subject matter is not an arbitrary collection of prescriptions. It aims to analyze business problems on the basis of established concepts. Is problem solving in nature: besides analyzing the managerial problems of business units, ME aims at finding out optimal solutions to the business problems 10/14/2011 Prof. Aradhya of firms.

Objectives of ME: to help the business firms to set the goals as realistically as possible to serve as a practical guide to businessmen in future planning, policy formulation and decision making. to make optimum use of scarce resources of a firm to maximize profits. to provide the most modern instruments & tools to find solutions to business problems. to give guidance for identification of key variables in business decision making process.

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Differences b/w ME & Economics

ME Economics Involves application of Deals with the body of the principles itself economic principles to the problems of the firm. Both macro & micro Micro economic in character. Deals with both individual Deals only with the firm economics of the firm Scope is ltd becos mainly Scope wider all theories theory profit is used. are also used eg: wages, interest Adopts, modifies , refermulates economic models Economic theory to suit specific conditions & hypothesizes economic serves specific problemrelationships & builds models. solving process. Economic theory makes assumption.

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Scope of ME: Theory of Demand: Analysis: Demand analysis is necessary for demand forecasting which is an important part of managerialdecision making because an estimate of future sales is essential for preparing production schedule and employing productive resources. It helps the mgmt in identifying the factors that influence the demand for the products of a firm. Demand Theory: it is the study of behavior of consumers. In studying the behavior of consumers, it answers questions such as : Why do the consumers buy a particular commodity? How much do they purchase a commodity? What is the effect of the income, habit and taste of consumers on the demand for a commodity? 10/14/2011 and when do the consumers stop to further Why Prof. Aradhya

 Theory of Production: helps in determining the size of a firm and the level of production. It helps how average and marginal costs change with changes in production. Under what conditions do the costs increase or decrease? How odes total production increase when input of one of the factors of production is increased keeping other factors constant? Production and cost analysis is important for the smooth functioning of production process and project planning
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 Theory of Exchange or Price theory: it explains how the commodity prices are determined under different types of market conditions. It is helpful in determining price policy of the firm. The success of a business and industrial firm depends upon the accuracy and correctness of price decisions taken by it. It includes the determination of product prices under different market conditions, pricing methods, pricing policies, different pricing, product-line pricing and price forecasting.

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 Theory of Profit: Profit= Total Revenue- Total Cost Profit is always uncertain because of following factors namely:
demand of the product prices of the factors of production nature & degree of competition in the market price behavior under changing conditions

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 Theory of Capital & investment: it explains the following important issues:

o o o o

Selection of most suitable investment project Most efficient allocation of capital Assessing the efficiency of capital Minimizing the possibility of Under-capitalization.

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 Environmental Issues: includes Social and political Environment in which a business and industrial firm has to operate and governed by such factors namely:
type of economic system of the country business cycles industrial policy of the country trade and fiscal policy of the country taxation policy of the country price and labor policy general trends in economy with regards to production , employment, income, prices savings & investment etc o general trends in the working of financial institutions in the country o social structure and class character of various social groups o political system of the country.
o o o o o o o

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Role of Managerial Economist

By assisting the mgmt in using the increasingly specialized skills & sophisticated techniques. Successful Decision making & forward planning To assist mgmt Business Environment: External Factors- beyond the control of the firm Business Operations: Internal Factors in control of the firms mgmt.

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Role & Responsibilities of Managerial 1. Demand Estimation & Forecasting Economist

2. Preparation of Business / Sales forecasts 3. Analysis of market survey to determine the nature & extent of competition 4. Analyzing the issues and problems of the concerned industry 5. Assisting the business planning process of the firm 6. Discovering new & possible fields of business endeavor & its costbenefit analysis as well as feasibility studies 7. Advising on pricing, investment & capital budgeting policies 8. Evaluation of capital budgets 9. Building micro & macro economic models of particular aspects of the firms activities that are useful in solving specific business problems 10.Most models are prediction oriented 11.Directing economic research activity 12.Briefing the management on current domestic & global economic issues and emerging challenges. 13.Interpretation, analysis & reporting of current economic matters, upcoming developments in business, government & foreign or global sectors
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Functions of Managerial Economist:

Sales forecasting Market research Analysis of competing firms Pricing problems Production programmes Investment Analysis & environmental forecasting

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Differences Between Micro & Macro Macro economics economics Micro economics
It studies the behavior of individual unit and small groups of such units. It deals with the individual units and has individualistic approach. It is concerned with the behavior of micro variables like individual demand, supply, wages etc. It deals with the individual incomes and output of a firm. It primarily deals with the problems of pricing and income distribution. It deals with the behavior of large aggregate in the economy It deals with the economy as a whole. And has aggregative approach. It is concerned with behavior of macro variables like national income, Price levels, Total Investment etc in the economy. It deals with the national income and output. It pertains to the problems of the size of national income, economic growth and general price levels

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Nature of managerial economics

Flow chart of decision making process within firm
Product demand estimate Output decision

output Input supply information Production technology information Input decision Productionp rocess decision

Managerial economics an interdisciplinary science Managerial economics is the applied economics

used for decision-making. It bridges gap between economic theory and decision making. Managerial economics is intimately related to accounting. Managerial economics is related to operational research. The researches have applied mathematical techniques applied to practical problems. Managerial economics uses statistics and mathematics for solving decision-making process.

Decision making Process in ME

ME is the integration of economic principles with business management practices. It is concerned with analytical tools and techniques of economics that are useful for decision making in business. ME as an applied economic science deals in analyzing the firms markets, industry trends and macro forces which are directly relevant to the concerned business activity.

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 It also guides the management by interpretation of that environment in terms, which are relevant o the conduct of the concerned business activity and action. It provides necessary skills in furtherance of business goals and functions. It is fundamentally concerned with interaction between internal operations of the business firm and the business economic environment such as marketing, business development, government business policies, government liaison, investment climate and finance affected by the macro-economic behavior & policies of the government.

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 It deals with a thorough analysis of key elements involved in the business decision making. It helps the manager to understand the intricacies of the business problems which make problem solving easier and quicker, arrive at correct and appropriate decisions, improve the quality of such decisions and so on.

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Establish Objectives

Define the Problem

Decision Making Process Identify factors that affect the Problem

Specify Alternative Solutions

Collect Data & other Information

Evaluate & Screen Alternatives

Implement Best Alternative & Monitor Results

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Decision Making Process in ME: Managers also face a wide range of decisions on any given day. 1. Setting Objectives: the first step in the decision process is to establish objectives. Objectives should be stated in a concrete operational from, because if they are started in a very general form, it becomes impossible for us to establish whether a particular decision brings us closer to the stated goals.

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2. Defining the Problem: Once the objectives have been established, the next phase in the decision process is to define the particular problem that gives rise to the need for a decision. In defining a problem, we should state problem precisely & explicitly. By asking the appropriate what, who, where, when, why and how questions, we can identify the real problems.

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3. Identifying Causal Factors: the identification of the real problems provides a basis for the next phase of the decision process; the explicit identification of factors that impinge on the identified problem and their influences on important variables.

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4. Finding Alternative Solutions: the next phase of the decision process is to identify possible alternative courses of action. The process of enumerating possible courses of action should be exhaustive. Often it is useful to have several people sit around a table brainstorming to compile a list of alternatives that is as complete as possible.

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5. Gathering Information: If we are to evaluate alternatives, we must have the necessary information to do so. Thus data related to the important variables impinging on the problem must be gathered.

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6. Evaluating Alternatives: the information that is found is used to evaluate and screen the alternatives previously specified. Some of the original alternatives may be eliminated without formal analysis because they are inconsistent with the objectives established at the outset. The evaluation of alternatives must be done with the prescribed objectives kept closely in mind. The best alternatives is the one that achieves the goals determined by those objectives or brings the firm closest to those goals.

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7. Implementing & Monitoring the Results: once the alternatives have been evaluated and screened, we begin the final phase of the decision process; to implement and monitor the appropriate actions. It is, important to establish procedures to monitor and evaluate the progress of the implemented solution.

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 Marginal Utility: Kind of utility which measures the additional benefit derived from the consumption of an additional unit of a commodity purchased. Econometrics: Is the science which deals with the determination of statistical methods of concrete quantitative laws in economic lifeOscar Lange. It is a discipline combining economic theory, statistical method and mathematical precision.

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Consumer surplus:
The excess of the price which a man would be willingly to pay rather than go without the thing, over that which he actually does pay is the economic measure of this surplus satisfaction- Alfred Marshall. Consumer Surplus= total Quality from the Commodity- total utility of money losting paying is price.

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Firms Objectives :
Profit Maximization Sales Maximization Achieving Leadership For avoiding Potential Competition For Preventing Govts Intervention For maintaining Customer Goodwill For Restraining Wage Demands

Modern Business Firms aim at 5 different objectives:

Production Objective Sales Objective Inventory Objective Market Share Objective Profit Objective.

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Business Operations:
It helps the mgmt in making decisions by studying & analysing : What should b the production schedule & inventory policies for the coming year? What should be the appropriate price & wage policies? How much cash will be available in the coming months & how it should be converted? What should be a reasonable sales & profit budget for the coming year?

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Importance of Economics Analysis:

Maximizes resource utilization Advocates market economy Basis of welfare economics Provides tools for evaluating economic policies Construction & use of models

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END of Module -1

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 Module-2 - Fundamental Principles of Managerial Economics.

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Principle of Opportunity Cost: Opportunity Cost of a decision means the sacrifice of the alternatives required by that decision- W.W.Haynes Opportunity cost {alternative cost, imputed costs} means the cost of foregone opportunities. Opportunity cost of a product or service means the revenue expected to be earned by the product or service if put to an alternative use. Opportunity cost requires the measurement of sacrifices. If there is no sacrifice involved by a decision, there will be no opportunity cost.

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Examples: The opportunity cost of holding Rs.500 as cash in hand for one year is the 10 per cent rate of interest, which would have been earned had the money been kept as fixed deposit in a bank. Business is the salary he could earn in other occupations. The opportunity cost of the time an entrepreneur devotes to his own.

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 Thus it should be remembered that opportunity costs require ascertainment of sacrifices. If a decision involves no sacrifices, its opportunity is nil. The concept of opportunity cost implies three things: the calculation of opportunity cost involves the measurement of sacrifices Sacrifices may be monetary or real the opportunity cost is termed as the cost of sacrificed alternatives.

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 Increment Principle: Incremental concept involves estimating the impact of decision alternatives on costs & revenues, emphasizing the changes in total cost and total revenue resulting from changes in prices, products, procedures, investments or whatever may be at stake in the decision. 2 basic components of incremental reasoning are: Increment cost: incremental cost may be defined as the change in total cost resulting from a particular decision Incremental Revenue: incremental revenue is the change in total revenue resulting from a particular decision.

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 Incremental cost is the differential cost that must be incurred if a decision is taken and that need not be incurred if the same is not executed. It is a change in total cost due to a change in the level of the activity. It involves estimating the impact of a decision on alternatives; on costs & revenues, stressing the changes in total cost and total revenue that result from changes in prices, products, producers investments or whatever may be at stake in the decision- Haynes, Mote and Paul.

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Principle of Time Perspective: The decisions of a business firm should be taken only after considering the short-run & long-term run effects of decisions on costs and revenues. Short run refers to a period of time which is long enough to allow the variable factors of production to be used in different amounts, Long run refers to a period of time which is long enough to bring about all the possible changes in all inputs.

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Principle of Discounting: it is fundamental principle of economics that the worth of a rupee receivable tomorrow is lesser than that of a rupee available today. This is because the future is uncertain and unknown. Hence, whenever the present value of a business is to be known the future values will have to be discounted. This present value is known as the discounted value.

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Principle of Equi-marginal Satisfaction & Productivity: {Principle of Maximum satisfaction} most popular principle of economics. An input should be so allocated that the value added by the last unit is the same in all casesthis generalization is called equi-marginal principle. An input should be allocated in such a manner that the value added by the last unit of the input is the same in all uses. This principle provides a basis for maximum exploitation of all the productive resources of a firm so that the profitability of the firm may be maximized
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The Contribution Principle: this Principle tells us that every factor of production makes its own contribution to productivity for the firm and that this contribution changes as the volume of output is changed. Production takes place under constraints. And these constraints change with changes in output. The contribution concept is often used in product-mix decisions, and in pricing decisions. It also applies to make-or-buy decisions

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The Negotiation Principle: Almost everything in real commercial world is negotiable such as housing prices, terms and conditions of payment, equipment parts, specification and their prices. If negotiation is successful, both parties are happy.

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