Managerial economics

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 INTRODUCTION
Emergence of managerial economics as a separate course of
management studies can be attributed to at least three factors

a) Growing complexity of business decision making process due to

changing market conditions and business environment.

b) The increasing use of economic logic, conceptual theories and tools

of economic analysis in the process of business decision making

process.

c) Rapid increase in demand for professionally trained managerial

manpower.

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 Defining Economics
Economics is a social science, which studies human
behaviour in relation to optimizing allocation of
available resources to achieve the given goals.

Eg : individual household behaviour, firm, industry and

nation

Economics is also a study of choice-making behaviour of

the people.

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 Managerial Economics

Managerial economics can be broadly defined as the study of

economic theories, logic and tools of economic analysis
that are used in the process of decision making. Economic
theories and techniques of economic analysis are applied to
analyze business problems, evaluate business options and
opportunities with a view to arriving at an appropriate
business decision.

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 Douglas : Managerial economics is concerned
with the application of economic principles and
methodologies to the decision making process
within the firm or organization. It seeks to
establish rules and principles to facilitate the
attainment of the desired economic goals of the
management.

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 Characteristics
Micro Economics
Economics of Firms
Uses Macro-economics Analysis
Managerial Economics is Pragmatic
Managerial Economics is Normative
Bridge between traditional economics and Business
Management

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 Nature

Arts or
science?

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 Scope
Demand Analysis
Cost Analysis
Pricing Practices and Policies
Profit Management
Capital Management
Analysis of Business Environment
Allied Disciplines

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 Difference b/w Managerial and Traditional
Economics
Traditional Managerial
It has Micro & Macro aspects Micro aspect
It is both positive and normative science Normative in nature
It deals with theoretical aspect Practical Aspect
It studies human Behavior on certain No assumptions
assumptions

We study Economic aspects of the Both economic and non-economic aspects

problem

Studies principles underlying rent, wages, Only the principles of profit

interest and profits

Limited scope Wide scope

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 Importance
Basis of Business Policies
Predicting economic Quantities
Estimating economics relationship
Helpful in Understanding the External forces
constituting the environment.
Reconciling theoretical concepts of economics in
relation to the actual business behavior and conditions.

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 MICRO ECONOMICS
The branch of economics that analyzes the market
behavior of individual consumers and firms in an
attempt to understand the decision-making process of
firms and households.
the analysis of the decisions made by individuals and
groups, the factors that affect those decisions, and how
those decisions effect others

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 Micro-economics applied to internal issues :
Operational issues are of internal nature. Internal issues include
all those problems which arise within the business organization
and fall within purview and control of the management .
Some of the basic internal issues are :
What to produce
How much to produce
Choice of technology i.e. choosing of the factor –combination
Choice of price i.e. how to price the commodity
How to promote sales
How to face the price competition
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 How to decide on new investments
How to manage capital and profit
How to manage inventory i.e. stock of both
finished goods and raw material
Most of the micro economic problems deals with
most of these questions.
The Law Demand
The Theory of Production
Analysis of Market Structure and Pricing
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Theory
 Profit analysis and management
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.
Theory of Capital and Investment Decisions
Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
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etc.
 MACRO ECONOMICS
Study of the entire economy in terms of the total
amount of goods and services produced, total income
earned, level of employment of productive resources,
and general behaviour of prices.
Macroeconomics examines economy-wide phenomena
such as changes in unemployment, national income,
rate of growth, gross domestic product, inflation and
price levels.

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 Macro-economics deals with external issues :
The type of economic system in the country
General trends in N.I., employment, prices, savings and
investments
Structural change in the working financial institutions viz.,
banks, insurance companies etc
Magnitude of and trends in foreign trade
Trends in labour supply and strength of capital market
Government’s economic policies i.e., industrial, monetary,
fiscal, price and foreign etc.
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 Social factors viz., value system of the society,
property rights, customs and habits etc.,
Political environment i.e., democratic, authoritarian,
socialist political systems, or state attitude towards
private business man etc.
These Environmental factors have a far-reaching
bearing upon the functioning and performance of the
firms. Therefore, decision makers have to take in to
account the present and future economic, political and

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social
 Conditions in the country and give due consideration
to the environmental factors in the process of decision
making.
Eg : SEZ in the Nandigram, Tata’s small car in Singur
district in West Bengal

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 Responsibilities of Managerial Economist
To make reasonable profits on capital employed.
Successful forecasts
Knowledge of sources of Economic Information
His status in the firm

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 Fundamental Concepts
Opportunity cost
Incremental Principle
Incremental Cost
Incremental Revenue
Business implication of Incremental Concept
Time Perspective
Series of order
Discrimination
Discounting Principle
The Equi-marginal Principle

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 Role of a managerial economist in the firm

Demand estimation and forecasting

Preparation of business /sales forecasts

Analysis of market survey to determine the nature and

extent of competition

Analyzing the issues and problems of concerned

industry

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 Assisting the business planning process of the firm

Discovering new possible fields of business endeavor and

its cost-benefit analysis

Advising on prices, investment and capital budgeting

policies

Evaluation of capital budgeting etc.

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 DECISION MAKING
AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.

“Decision making and processing information are two

important tasks of managers”

In order to make good decisions managers must be able

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 Decision
Making
Areas

Demand
forecastin Production Study of Pricing and Investment
planning economic related decisions
g
and cost environmen decisions
revenue t
decision

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