Managerial economics is the application of economic theory and methodology to managerial decision making. It helps managers anticipate problems and determine solutions related to costs, prices, profits, and other issues. The scope of managerial economics includes demand analysis, production theory, exchange theory, profit theory, capital and investment theory, and environmental issues. It uses microeconomic analysis and principles like opportunity cost, marginal analysis, and discounting to help managers make optimal decisions. The goal of managerial economics is to support management in decision making, planning, and policy formulation.
Managerial economics is the application of economic theory and methodology to managerial decision making. It helps managers anticipate problems and determine solutions related to costs, prices, profits, and other issues. The scope of managerial economics includes demand analysis, production theory, exchange theory, profit theory, capital and investment theory, and environmental issues. It uses microeconomic analysis and principles like opportunity cost, marginal analysis, and discounting to help managers make optimal decisions. The goal of managerial economics is to support management in decision making, planning, and policy formulation.
Managerial economics is the application of economic theory and methodology to managerial decision making. It helps managers anticipate problems and determine solutions related to costs, prices, profits, and other issues. The scope of managerial economics includes demand analysis, production theory, exchange theory, profit theory, capital and investment theory, and environmental issues. It uses microeconomic analysis and principles like opportunity cost, marginal analysis, and discounting to help managers make optimal decisions. The goal of managerial economics is to support management in decision making, planning, and policy formulation.
By:- Manoj Kumar Gautam The Definition and Scope of Managerial Economics After studying the chapter, you should understand: 1. the subject matter of Managerial Economics 2. the analytical approach used in Managerial Economics 3.Elucidate on the characteristics and scope of managerial economics 4.Describe the techniques of managerial economics Introduction Managers in all type of organization are confronted with two type of problem: Decision Making Forward planning Managerial + Economics
Economics: Economics is primarily concerned with analyzing and providing answer to the various economic problem
Management: Planning, Organizing, leading and Controlling the efforts of a group of people towards some common objective What is Managerial Economics? 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. What is Managerial Economics? Howard Davies and Pun-Lee Lam - It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics. Spencer & Siegelman- It is the integration of economic theory & Business practice for the purpose of facilitating decision making & forward planmning by Management These Definitions Cover a Number of Different Approaches 1. Analysis based on the theory of the firm 2. Analysis based upon management sciences 3. Analysis based upon industrial economics
Count.. Managerial economics is thereby a study of application of managerial skills in economics. It helps in anticipating, determining and resolving potential problems or obstacles. These problems may pertain to costs, prices, forecasting future market, human resource management, profits and so on.
Basic Nature of Economic Positive Economics:- Derives useful theories with testable propositions about WHAT IS. Normative Economics:- Provides the basis for value judgements on economic outcomes.WHAT SHOULD BE Scope: Demand Analysis and forecasting Resource Allocation Pricing Cost Analysis Competitive analysis Strategic Planning
Scope of managerial economics The scope of managerial economics includes following subjects: 1) Theory of Demand 2) Theory of Production 3)Theory of Exchange or Price Theory 4) Theory of Profit 5) Theory of Capital and Investment 6) Environmental Issues
CHARACTERISTICS OF MANAGERIAL ECONOMICS
1. Microeconomics 2. Normative economics 3. Pragmatic(Applied) 4. Uses theory of firm 5. Takes the help of macroeconomics 6. Aims at helping the management 7. A scientific art 8. Prescriptive rather than descriptive
1. Microeconomics: It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market.
2. Normative economics:
It is concerned with varied corrective measures that a management undertakes under various circumstances. It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision- making and optimal utilization of available resources, come under the banner of managerial economics.
3. Pragmatic: Managerial economics is pragmatic. However, in managerial economics, managerial issues are resolved daily and difficult issues of economic theory are kept at bay.
4. Uses theory of firm: Managerial economics employs economic concepts and principles, which are known as the theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory.
5. Takes the help of macroeconomics:
Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the successful functioning of a business enterprise
6. Aims at helping the management: Managerial economics aims at supporting the management in taking corrective decisions and charting plans and policies for future.
7. A scientific art:
It is also called a scientific art because it helps the management in the best and efficient utilization of scarce economic resources. It considers production costs, demand, price, profit, risk etc.
8. Prescriptive rather than descriptive:
Managerial economics is a normative and applied discipline. It suggests the application of economic principles with regard to policy formulation, decision- making and future planning. It not only describes the goals of an organization but also prescribes the means of achieving these goals.
Importance of managerial economics
1.Accommodating traditional theoretical concepts to the actual business behavior and conditions 2.Estimating economic relationships 3.Predicting relevant economic quantities 4.Understanding significant external forces: External factors Internal factors:
Count.. 5. Basis of business policies 6 Analysis of Business Problem 7 Helpful in Decision Making 8 Reducing Risk & Uncertainty
Techniques of managerial economics:
The theory of the firm, which elucidates how businesses make a variety of decisions The theory of consumer behavior, which describes decision making by consumers
The theory of market structure and pricing, which opens a window into the structure and characteristics of different market forms under which business firms operate
Business Decisions or Decision- Making in Business The thought process of selecting a logical choice from the available options. For effective decision making, a person must be able to forecast the outcome of each option as well, and based on all these items, determine which option is the best for that particular situation.
Features of Decision - Making Goal Oriented Various Alternatives Freedom to Choose Judgmental and Emotional Continuous Process Trewatha & Newport defines decision making process as follows:, Decision-making involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem. Types of Business Decisions Production Decisions Personnel Decisions Financial Decisions Marketing Decisions Steps involved in Decision-Making process Defining / Identifying the managerial problem, Analyzing the problem, Developing alternative solutions, Selecting the best solution out of the available alternatives, Converting the decision into action, and Ensuring feedback for follow-up.
Role of a Managerial Economist in Business Decisions Task of making Specific decisions by managers Production scheduling Demand forecasting Market research Economic Analysis of the industry
Cont
Investment appraisal Security management analysis Advice on Foreign exchange management Advice on trade Pricing and the related decision and Analyzing and Forecasting environmental factor
Principles of Managerial Economics 1.Incremental Principle:-This principle states that a decision is said to be rational & sound if given the firms objective of profit maximisation, It leads to increase in profit, Which in either of two Scenarios- a. If total revenue increases more than total cost b. If total revenue declines less than total cost
Equi Marginal principle:-It states that a consumer will reach the stage of equilibrium when the marginal utilities of various commodity he consumes are equal. The Law of Equi Marginal Utility:- According to the modern Economist, This law has been formulated in form of law of proportional marginal utility. It states that the consumer will spend his money income on different goods in such a way that the marginal utility of each good is proportional to its price. Opportunity cost principle:- it is one of the important & fundamental concept in economics. 1. opportunity cost is the minimum price that would be necessary to retain a factor price in its given use. It is also defined as cost of sacrificed alternatives. 2. By opportunity cost of a decision is meant the sacrifice of alternatives required by that decision. Time perspective Principle:- According to this principle, a manager should give due emphasis, both to short term & long term impact of his decisions, giving apt significance to the different time periods before reaching any decision. Short run refers to a time period in which some factors are fixed while other are variable. The production can be increased by increasing quantity of variable factor of production. Long term is a time period in which all factors of productions can become variable. Entry & exit of sellers firms can take place easily. Discounting Principle:- According to this principle, if a decision affects costs & revenues in long run, all those costs & revenues must be discounted to the present values before valid comparison of alternatives is possible. Discounting can be defined as a process used to transform future rupees into an equivalent number of present rupees. this is essential because a rupee worth of money ata future date is not worth a rupee today. Money actually has a time value. For instance- Rs 100 Invested today @ 10% is equivalent to Rs 110 next year. Economic Growth & Development Economic Growth: Economic Growth is an increase in aggregate output of real goods and services over a period of time
Economic Development: is a broader term and includes besides economic growth, qualitative change in technical, structural and institutional arrangement by which higher output is made possible and distributed.