MANAGERIAL ECONOMICS

1
MANAGERIAL ECONOMICS

• Key terms by Rahul Jain

2
What is Economics?

• Economics is the social science that studies the
  production, distribution, and consumption of
  goods and services. The term economics comes from
  the Greek for oikos (house) and nomos (custom or
  law), hence "rules of the house(hold).
• Managerial Economics can be defined as the study
  of economic theories, logic and tools of economic
  analysis that are used in the process of business
  decision- making.
• It is the integration of economic theory with
  business practice for the purpose of facilitating
  decision making and forward planning by
  management Spencer and Seigelman

3
(No Transcript)
4

• How Economics Contributes To Managerial Task Of
  Decision Making
• Building Analytical models to help recognize the
  structure of managerial problems.
• Economic theory contributes to the business
  analysis.
• Economic theories to clarify various concepts
  used in business to avoid conceptual pitfalls.
• The process of Business Decision-Making comprises
  of
• four phases
• Defining the objective to achieve
• Collections and analysis of business related data
  (economic,social,political and technological
  environment)
• Taking possible course of actions and
• Selecting from the available alternatives.

5

• Microeconomics is a branch of economics that
  studies how individuals, households and firms
  make decisions to allocate limited resources,
  typically in markets where goods or services are
  being bought and sold.
• Micro-Economics Applied to Operational Issues
• The issues that arise within the business are
  operational
• issues, and the following are the theories
  applied
• Theory of Demand
• Theory of Production and Production Decisions
• Analysis of Market-Structure and Pricing Theory
• Profit Analysis and Profit Management
• Theory of Capital and Investment Decisions

6

• Macroeconomics, on the other hand, involves the
  "sum total of economic activity, dealing with the
  issues of growth, inflation and unemployment and
  with national economic policies relating to these
  issues" and the effects of government actions
  (such as changing taxation levels) on them.
• Macro-Economics applied to Business Environment
• The issues that pertain to the business
  environment in planning
• and formulation of the future strategy under
  these three
• categories
• Issues related to Macroeconomic trends in the
  Economy
• Issues related to Foreign Trade
• Issues related to Government Policies

7
Tools Of Managerial Economics

• Mathematical Tools
• Statistics
• Operations Research
• Management Theory and Accountancy

8
Gap Between Theory And Practice and the Role of
Managerial Economics

• It is known that there is a gap between theory
  and practice. Theory which appears logically
  sound may not be directly applicable in practice.
• Example Small business thinking to expand uses
  lots of resources and man power but cant get the
  same results as he expected .
• Objective of economic analysis is not to provide
  a machine or method which will instantly fit the
  problem and furnish a solution but to provide
  ourselves with an organized and orderly method of
  thinking out a particular problem

9
Managerial Economics Bridges The Gap

• Managerial economics applies economic logic and
  
• analytical tools to sift wheat from the chaff.
• The economic logic and tools of analysis guide
  them in
• Identifying the goals
• Collection of data
• Analyzing the facts
• Taking out conclusions
• Determining alternatives for achieving the goals
• Taking the final decision

10
FUNDAMENTAL CONCEPTS USED IN BUSINESS DECISIONS
11
OPPURTUNITY COSTS

• Scarcity and alternative uses of the resources
  gives rise to the concept of
• Oppurtunity cost.

• Oppurtunity cost of availing an oppurtunity is
  the foregone income
• Expected from the second best oppurtunity
  of using the resources.

• For example there are three firms and have to
  make a decision for the
• Disposal of 100 million rupees and there are
  three alternatives.
• Expansion of the firm
• Setting up a new unit of production
• Buying shares in another firm
• Annual return of these three alternatives is
• 20 million
• 18 million
• 16million
• The decision would be to invest in the
  alternative one.The manager will have to
  sacrifice the annual return from the next best
  alternative that is alternative two.

12

• ACCOUNTING PROFIT
• TOTAL REVENUE TOTAL COST
• ECONOMIC PROFIT
• ECONOMIC REVENUE - ECONOMIC COST
• ECONOMIC COST
• ACCOUNTING COST IMPLICIT COST

13
Actual earnings opportunity cost economic
gain or economic profit. This concept
can be applied to all kinds of resources.
14
What is Macroeconomics?

• Macroeconomics is the study of the economy as a
  whole.

15
Samuelson defined it as ,

• Macroeconomics is the study of the behaviour of
  the economy as a whole. It examines the overall
  levels of a nations output, employment, prices
  and money

16
Importance of macroeconomics

• The importance of macroeconomics lies in
  providing a theoretical framework for finding
  solutions to three problems-
• Problems of economic growth,
• Unemployment, and
• Inflation.