module 1 me
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The Organisation that is successful is the one that can best deal with surprises.
MANAGERIAL ECONOMICSAn Analysis of Business Issues
AimsThis course / subject reviews economic principles
in the context most relevant to business : – Production processes,
– demand patterns, cost structures,
– market conditions
– pricing policies, and
– the impact of all the above on business decisions
Cases and problems illustrate how economic concepts can be applied in business to the problems of the organisation.
This module deals with:
•Meaning and definition of Managerial Economics
• The nature, scope and significance of Managerial Economics
• The place of Managerial economics in the Economics discipline i:e Micro and Macro economics.
• How do managers make their decisions? Role of Managerial Economists
•Decision making process
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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.”
Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”
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What is Managerial Economics?
Milton H Spencer and Louis Siegleman
“It is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management.”
It is the study of allocation of resources available to a firm among its activities.
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These Definitions Cover mainly two aspects of management i:e
• Forward planning
•Decision making.
Nature & characteristics of ME Micro in nature: Deals with a firm Application of Micro concepts:
Demand & Supply analysis, Cost Prod analysis Application of Macro Concepts:
National Income, Price levels, Investments Conceptual & Metrical Best decision tool for management Pragmatic & Realistic Normative/Prescriptive
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Macroeconomics
Economics
Microeconomics
International Economics
Regional Economics
Money, finance, banking concerned with the nation
“Sector” economics
Managerial economics
Economic Development
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The Use of Economic Models
Positive Economics:-
Derives useful theories with testable propositions about WHAT IS.
Normative Economics:-
Provides basis for value judgments on economic outcomes. WHAT SHOULD BE or WHAT OUGHT TO BE
Positive Economics:-
Derives useful theories with testable propositions about WHAT IS.
Normative Economics:-
Provides basis for value judgments on economic outcomes. WHAT SHOULD BE or WHAT OUGHT TO BE
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What is the purpose of economic analysis?
Why do we want to apply economic analysis to business problems?
What is the purpose of economic analysis?
Why do we want to apply economic analysis to business problems?
For the academic economist: to understand, to make predictions about firm’s behavior The “positive” approach to theory: What is?
For the businessperson: “to assist decision-making”, to provide decision-rules which can be applied The “normative” approach to theory: What should be?
These purposes are different, they can lead to misunderstanding.
Scope of ME An analysis of scarcity of resources &
choice making poses 3 basic questions:
1. What to produce & how much to?
2. How to produce?
3. Whom to produce?
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Scope of ME
Basic Questions Related concepts
What to produce & How much to produce?
Product decision: Demand & its elasticity, forecasting
How to produce? Input-Output decision: Production & Cost analysis, Capital Budgeting
Whom to produce? Segment decision: Consumer Behaviour- Pricing & Profit decision
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Scope of METhe scope covers the following areas in
ME. Demand analysis Production & Cost analysis Pricing & Output Theory Profit management Investment &Capital Budgeting Market Competition
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Importance / Significance of ME Knowledge of ME helps in making wise
choices. It is goal oriented Aims at maximum achievement of
objectives Helps in decision making. Helps in model building Provides concepts to solve business
problems16
Role of ME in Managerial Decision MakingRole of ME in Managerial Decision Making
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures
Theory of pricing
Demand & Supply analysis
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures
Theory of pricing
Demand & Supply analysis
Quantitative Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Optimisation
Quantitative Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Optimisation
Managerial Economics
Use of economics concepts and decision making tools to solve managerial decision problems
Managerial Economics
Use of economics concepts and decision making tools to solve managerial decision problems
Optimal solutions Optimal solutions
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How Can Managerial Economics Assist Decision-Making?
How Can Managerial Economics Assist Decision-Making?
1. Adopt a general perspective, not a sample of one
2. Simple models provide stepping stone to more complexity and realism
3. Thinking logically
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Why Managerial Economics?- The need for ME
A powerful “analytical engine”. A broader perspective on the firm.
• what is a firm?• what are the firm’s overall objectives?• what pressures drive the firm towards profit and
away from profit The basis for some of the more rigorous
analysis of issues in Marketing and Strategic Management.
Role of managerial Economist
Making decisions & processing information are the two tasks of managers.
It involve two kinds of decisions. They are
1. Specific decisions
2. General decisions
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Specific decisions Production scheduling Demand forecasting Market research & Marketing decisions Economic analysis of the industry Investment appraisal Cost decisions Inventory decisions Pricing and related decisions Analysis & forecasting environmental factors
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General Decisions Learn about the general eco conditions
of the economy & advise mgt Understand consumer behaviour and
advise mgt Input cost analysis Find other opportunities for business
expansion Update mgt on govt’s economic policies
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Responsibilities of Managerial Economist Set objectives in line with organization's Make accurate forecasting Maximizing firm’s profits Use of specialized skills and tech to solve business
problems Bring synthesis in policies pertaining to prod,
investment, stock, price, cost etc Study & interpret economic data Ready to undertake special assignments Alert mgt timely in all respects Working for the whole business concern
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Difference b/n ME & Traditional EconomicsTraditional eco. ME
Deals with study of concepts, principles & theory aspects of the economics
Includes both micro & macro concepts of eco.
Both positive & Normative Considers only eco factors
affecting a problem Doesn't depend upon
process of decision making
Deals with application of economic principles to business problems
Includes only micro concepts of economics
It is a normative science Considers both eco & Non-
eco factors affecting problem
Very much depends on decision making
Difference b/n Micro & Macro economicsMicro economics Macro economics
Deals with individual firm. Studies behaviour of a firm
or small groups of firms. Gives micro-scopic view of
the economy. Individualistic approach. Concerned with problems of
micro variables like indv dd, ss .
Deals with indv income & output.
deals with problems of pricing, income distribution of a firm.
Deals with economy as whole.
Studies behaviour of large aggregates in the economy.
Gives a complete view about the economy.
Aggregate methodological appr.
Concerned with problems of macro variables like national income, price, investments
Deals with national income & output.
deals with problems of pricing, income of the nation
Relation to other branches of knowledge
ME has a close linkage with other disciplines & field of study. They are:
1.Economics
2.Theory of Decision Sciences
3.Operation research
4.Statistics
5.Accounting
6.Mathematics
ME – Science or ArtsME is both science and an Art.As Science: Science is the systematic study of body
of knowledge. As science ME has the systematic approach to deal with any problem concerning the organization and approaches step by step to resolve it.
As Art: Deals with process of getting things done. The process of decision making varies from person to person and it is art to handle the crisis. Economist has to advise & assist the firm in taking right decisions Hence, he should be an expert in the field.
Difference b/n ME & Traditional EconomicsTraditional economics Managerial economics
Deals with study of concepts, principles & theory aspects of the economics
Includes both micro & macro concepts of eco.
Both positive & Normative Considers only eco factors
affecting a problem Doesn't depend upon
process of decision making
Deals with application of economic principles to business problems
Includes only micro concepts of economics
It is a normative science Considers both eco & Non-
eco factors affecting problem
Very much depends on decision making
Difference b/n Micro & Macro economicsMicro economics Macro economics
Deals with individual firm. Studies behaviour of a firm or
small groups of such firms. Gives micro-scopic view of the
economy. Individualistic approach. Concerned with problems of micro
variables like indv dd, ss . Deals with indv income & output. Primarily deals with problems of
pricing, income distribution of a firm.
Deals with economy as whole.Studies behaviour of large
aggregates in the economy.Gives a complete view about the
economy.Aggregate methodological appr.Concerned with problems of
macro variables like national income, price levels, etc.
Deals with national income & output.
Primarily deals with problems of pricing, income distribution of the nation
Relation to other branches of knowledge
ME has a close linkage with other disciplines & field of study. They are:
1.Economics
2.Theory of Decision Sciences
3.Operation research
4.Statistics
5.Accounting
6.Mathematics
ME – Science or ArtsME is both science and an Art.
As Science: Science is the systematic study of body of knowledge. As science ME has the systematic approach to deal with any problem concerning the organization and approaches step by step to resolve it.
As Art: Deals with process of getting things done. The process of decision making varies from person to person and it is art to handle the crisis. Economist has to advise & assist the firm in taking right decisions Hence, he should be an expert in the field.