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UNIT 1

INTRODUCTION

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Douglas managerial economics is

concerned with the application of

economic principles and methodologiesto the decision making process withinthe firm or organisation. It seeks toestablish rules and principles to

facilitate the attainment of the desiredeconomic goals of management

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Application of Economic tools

Clear understanding of various concepts

Helps in ascertaining the relevant variables

and specifying relevant data

Theories state relationship between two or

more economic variables and events.

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Scope of economics

Economics could be broadlyclassified as

1. Microeconomics

2. Macroeconomics

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Microeconomics

Applied to operational/internal issuesThose issues or factors which arecontrolled by the management

1. Choice of business

2. Choice of new techniques

3. Choice of price

4. Choice of promotional activities

5. How to face competition

6. How to decide on new investments

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Theories

Theory of Demand

Theory of Production and Productiondecision

Analysis of market Structure andPricing theory

Profit analysis & Management

Theory of Capital & Investments

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Macroeconomics

Applied to Business Environment

Those issues or factors which areuncontrolled by the management

1. Issues related to Macro variables

2. Issues related to Foreign Trade

3. Issues related to Government Policies

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Relationship with Other Disciplines

Mathematics

Statistics

Operations research

Management Theory & Accountancy

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Objectives and goals

An objective is a sub goal. It identifies a short-term,

measurable step within a designated period of time that ismoving toward achieving a long-term goal.

Goals are broad ,objectives are narrow.

Goals are general intentions ; objectives are precise.

Goals are intangible; objectives can be tangible or intangible.

Goals can't be validated as is; objectives can be validated.

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Objectives of the Firm

Profit Maximisation

Market Leader

Avoiding potential competitions

Preventing government inventions

Customers goodwill Financial soundness and liquidity

Social responsibility

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Decision making in Business

Decision making can be regarded as the mentalprocesses resulting in the selection of a course of actionamong several alternatives. Every decision making process

produces a final choice. The output can be an action or an

opinion of choice.

Application of Economic Theory to Business Practice

1. Theory of the firm

2. Cost concepts

3. Profit Concepts

4. Measurement of Economic Relationship

5. Predicting Economic quantities

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Steps in Decision- Making

SpecificObjectives

Identification ofProblems

Search foralternatives

Evaluation ofAlternatives

Choice of

alternativeActionResults

Feed Back

Decision Making Process

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Fundamental concepts that aid Decision in Business

1. Incremental Concept

2. Concept of Time Perspective

3. Discounting principle

4. Opportunity Cost5. Equi-marginal Principle

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