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7/23/2019 Managerial Economics Ch 1
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Dr. Karim Kobeissi
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Chapter 1: Introduction to Managerial Economics
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K e y w o r d : T h e o r y o f T h e i r m
A microeconomic concept founded in neoclassical economics
that states that rms exist and make decisions in order to
maximize prots. Businesses interact with the market to
determine pricing and demand and then allocate resources
according to models that look to maximize net prots.
The theory of the rm goes along with the theory of the consumer,
which states that consumers seek to maximize their overall utility.
Modern takes on the theory of the rm sometimes distinguish
etween long!run motivations "sustainaility# and short!run
motivations "prot maximization#.
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Managerial Economics ! De"nition
Managerial economics is concerned with the
application of economic tools and
methodologies to the decision making process
within the rm. $t seeks to estalish rules to
facilitate the attainment of the desired
economic aim of management. These economic
aims relate to costs, revenue and prots.
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Economics# $usiness Management and
Managerial Economics
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Managerial %conomics ridges the gap
etween purely analytical prolems
dealt within economic theory and
decision prolems faced in real
usiness and thus helps out in making
rational choices to yield maximum
return out of minimum e&orts and
resources y making the est selection
among alternative course of action.
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Managerial Economics ! Importance
Business and industrial enterprises aim at earning
maximum prots. $n order to achieve this o'ective, a
managerial executive has to employ decision making. A
sound decision re(uires fair knowledge of the aspects
of economic theory and the tools of economic analysis,
which are directly involved in the process of decision!
making. )oncerned with such aspects and tools of
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Managerial Economics % Importance &con'
The importance of managerial economics
relies in the following points:*. $t provides tool and techni(ues for managerial decision
making.
+. $t gives answers to the asic prolems of usiness
management.
. $t supplies data for analysis and forecasting.
-. $t provides tools for demand forecasting and prot
planning.
. $t guides the managerial economist.
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Managerial Economics ! (atureThe whole ody of economics may e divided into two segments
3 Microeconomics and Macroeconomics. Microeconomics
is concerned with smaller part of the economy such asa "rm &e.g.# )upply and demand# pricing of output# Coststructure' while macroeconomics is concerned with thewhole economy &e.g. +D,# unemployment# in-ation#"scal and monetary policies# business cycles'.
Although, managerial economics falls within microeconomics as
it is concerned with the prolems of an individual rm4
however, it incorporates certain aspects of the macroeconomic
theory ecause the manager should have a comprehensive
understanding of the environment in which his rm is working
efore analyzing alternatives or taking decisions.
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%conomics in its roadest sense means what economists do. They
provide solutions to various economic prolems "in1ation,
unemployment etc#. The one main root cause of all economic
prolems is )C/CIT0 and managerial economics is the use ofeconomic analysis to mae business decisions involving the est
use of organization5s scarce resources. 6uman wants are virtually
unlimited and insatiale and economic resources to satisfy them are
limited which give rise to choices " decisions# etween what to
produce, how to produce and for whom to produce.
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What kind and how many products should e
produced7
Howshould these products e produced "production
model8technology#7
For whom should these products e produced
"targeted segments#7
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%conomic 9ecisions for the :irm
;hat< The product decision = egin or stop providing
goods and8or services.
6ow< The hiring, sta>ng, procurement, and capital
udgeting decisions.
:or whom< The market segmentation decision =
targeting the most enecial customers.
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)cope of Marginal Economics
1! Demand nalysis and orecasting:
A rm is an economic organization which transforms inputs into output that is
to e sold in a market. Accurate estimation of demand, y analyzing the
forces acting on demand of the product produced y the rm, forms the
vital issue in taking e&ective decision at the rm level.
A ma'or part of managerial decision making depends on accurate estimatesof demand. ;hen demand is estimated, the manager does not stop at the
stage of assessing the current demand ut estimates future demand as
well. This is what is meant y demand forecasting.
This forecast can also serve as a guide to management for maintaining or
strengthening market position and enlarging prot. 9emand analysis helps
in identifying the various factors in1uencing the demand for a rm5s
product and thus provides guidelines to manipulate demand. The main
topics covered are< 9emand 9eterminants, 9emand 9istinctions and
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)cope of Marginal Economics
2! Cost nalysis:
)ost analysis is yet another function of managerial economics. $ndecision making, cost estimates are very essential. The factors
causing variation in costs must e recognized if management
is to arrive at cost estimates which are signicant for planning
purposes. The determinants of estimating costs, the
relationship etween cost and output, the forecast of cost and
prot are very vital to a rm. An element of cost uncertainty
exists ecause all the factors determining costs are not always
known or controllale. Managerial economics handles these
aspects of cost analysis as an e&ective knowledge and the
application of which is corner stone for the success of a rm.
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)cope of Marginal Economics
3! ,roduction nalysis:
?roduction analysis fre(uently proceeds in physical terms. $nputsplay a vital role in the economics of production. The factors of
production otherwise called inputs, may e comined in a
particular way to yield the maximum output. Alternatively,
when the price of inputs shoots up, a rm is forced to work out
a comination of inputs so as to ensure that this comination
ecomes the least cost comination. The main topics covered
under cost and production analysis are production function,
least cost comination of factor inputs, factor productiveness,
returns to scale, cost concepts and classication, cost!output
relationship and linear programming.
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)cope of Marginal Economics
4! In5entory Management :
An inventory refers to a stock of raw materials which a rmkeeps. @ow the prolem is how much of the inventory is the
ideal stock. $f it is high, capital is unproductively tied up. $f
the level of inventory is low, production will e a&ected.Therefore, managerial economics will use such methods as
%conomic rder uantity "%# approach, AB) analysis
with a view to minimizing the inventory cost. $t also goesdeeper into such aspects as motives of holding inventory,
cost of holding inventory, inventory control, and main
methods of inventory control and management.
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)cope of Marginal Economics
6! d5ertising :
To produce a commodity is one thing and to market it isanother. Cet the message aout the product should reach the
consumer efore he thinks of uying it. Therefore,
advertising forms an integral part of decision making and
forward planning. %xpenditure on advertising and related
types of promotional activities is called selling costs y
economists.
There are di&erent methods for setting advertising udget
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