Headlines

Airline Sued for Predatory pricing.

Telecommunication Firms Plan to Cut Rates Unlikely to boost Calls Much

Cola Price Wars Continue

Crores of Rupees lost each year because many existing managers fail to use basic Managerial Economics

Manager:A person who directs resources to achieve a stated goal. Managerial Economics Economics:The science of making decisions in the presence of scarce resources. Managerial Economics:The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

What about the nature of M.E?

Management decision problems Economic theory Decision Microeconomics Sciences Macroeconomics Mathematical Economics Econometrics Managerial Economics:

Application of economic theory and decision science tools to solve managerial decision problems

Case Studies
Decision Making in Business and Military Strategy The Management Revolution (Sources:Fortune,Forbes etc)

The Theory of the Firm

Firm behavior-The centerpiece and central theme of ME Firm-Is an organization that combines and organizes resources for the purpose of producing goods and/or services for sale. Reasons for Firms existence-transaction costs Function of Firms-Circular flow of economic activity

The Theory of the Firm(contd)

The Objective of the Firm-Maximise value-longrun profits. Value of the Firm-Present value of all expected future profits of the firm Constraints on the operation of the firmConstrained optimization Limitations of the Theory-Too narrow and unrealistic-alternatives-maximization of sales (Baumol), maximization of management utility (Williamson & others ),satisficing behavior (Cyert and March)

Profit- Meaning
Accounting Profit = Total Revenue (TR) Explicit costs (W + R + I + M) Economic Profits or Pure Profits = TR Explicit costs - Implicit costs (Opportunity costs) (Referred to as Economic Value added (EVA)) Gross Profits = TR TE (Total Expenditure) Net Profits = Gross profits Rewards to factors of production - Depreciation

GROSS/NET PROFIT NET SALES Less: Cost of goods sold Gross Profit Less: Expense
Employee Compensation:1,50,000 Advertising : 30,000 Utilities & Maintenance: 20,000 Miscellaneous: 10,000

5,00,000 2,50,000 2,50,000

ACCOUNTING/ECONOMIC PROFIT TOTAL REVENUES 5,00,000 Less : Explicit Costs

Cost of goods sold : 2,50,000 Employee compensation: 1,50,000 Advertising: 30,000 Utilities & Maintenance: 20,000 Miscellaneous: 10,000

Total 2,10,000
Accounting profits before Taxes

4,60,000 40,000

Total

Less: Implicit Costs Salary (manager): 30,000 Rent: 18,000 40,000 Total Economic Profit(or loss) Before taxes 48,000

Net Profit Before Taxes (Gross Profit-Expenses)

8,000

The Nature and Function of Profits

Theories of ProfitRiskbearing;Frictional;Monopoly;Innovation; Managerial Efficiency.

Vital Issues
Business ethics(Boeing Case-Study)
The International framework of Managerial Economics-Globalization of economic activity ME and the internet

Case Studies
The Virtual Corporation The rise of the Global Corporation
The Global Business leader

New Management Tools

Benchmarking(Also Case Study) Total Quality Management(Also Case Study) Reengineering(Also Case Study) The Learning Organization Broad banding

New Management Tools (contd)

Direct business model Networking Pricing power Small-world model Virtual Integration Virtual management