103+Managerial+Economics+1

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Introduction to ManagerialIntroduction to Managerial

EconomicsEconomics


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Analysing the Situation.Analysing the Situation.

What is the basic problem in theWhat is the basic problem in the

case?case?What questions need to beWhat questions need to be

answered?answered?


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Economics and ManagerialEconomics and Managerial

Decision MakingDecision MakingQuestions that managers mustQuestions that managers must

answer:answer:

Should our firm be in this business?Should our firm be in this business? If so, what price and output levelsIf so, what price and output levels

achieve our goals?achieve our goals?


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answer:answer:How can we maintain a competitiveHow can we maintain a competitive

advantage over our competitors?advantage over our competitors?CostCost--leader?leader?

Product Differentiation?Product Differentiation?

Market Niche?Market Niche?

Outsourcing, alliances, mergers,Outsourcing, alliances, mergers, acquisitions?acquisitions?

International DimensionsInternational Dimensions


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answer:answer:

What are the risks involved?What are the risks involved?RiskRisk is the chance or possibility thatis the chance or possibility that

actual future outcomes will differactual future outcomes will differfrom those expected today.from those expected today.


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Decision MakingDecision Making Types of riskTypes of risk

Changes in demand and supply conditionsChanges in demand and supply conditions

Technological changes and the effect ofTechnological changes and the effect of

competitioncompetition Changes in interest rates and inflation ratesChanges in interest rates and inflation rates

Exchange rates for companies engaged inExchange rates for companies engaged ininternational tradeinternational trade

Political risk for companies with foreignPolitical risk for companies with foreignoperationsoperations


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Economics of a businessEconomics of a business

Economics ofa businessEconomics ofa business refers torefers tothe key factors that affect the abilitythe key factors that affect the abilityof a firm to earn an acceptable rateof a firm to earn an acceptable rate

of return on its owners investment.of return on its owners investment.The most important of these factorsThe most important of these factors

areare

competitioncompetition technologytechnology

customerscustomers


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IntroductionIntroduction

Organisation & ManagementOrganisation & Management

Economics and Managerial DecisionEconomics and Managerial Decision

MakingMakingManagerial EconomicsManagerial Economics

The Economics of a BusinessThe Economics of a Business

Relationship of Economics with otherRelationship of Economics with otherdisciplinesdisciplines


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What is an Organisation?What is an Organisation?

Two or more people.Two or more people.

Working together in a structured wayWorking together in a structured wayHaving a set of specific goalsHaving a set of specific goals


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What is management?What is management?

Efforts of a group of people.Efforts of a group of people.

Direction, guidance and controlDirection, guidance and control

Towards a common objective.Towards a common objective.


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Defining ManagementDefining Management

It identifies a group of people whose job isIt identifies a group of people whose job isto direct the efforts and activities of otherto direct the efforts and activities of otherpeople towards organisational objectives.people towards organisational objectives.

Koontz & ODonell define management asKoontz & ODonell define management asthe creation and maintenance of anthe creation and maintenance of aninternal environment, in an enterprise,internal environment, in an enterprise,where individuals working together canwhere individuals working together canperform efficiently and effectively towardsperform efficiently and effectively towardsthe attainment of group goals.the attainment of group goals.


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Thus, management is:Thus, management is:

An ongoing processAn ongoing process

CoordinationCoordinationArt of getting things done by peopleArt of getting things done by people


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What is economics?What is economics?

Science of wealth (defined by AdamScience of wealth (defined by AdamSmith)Smith)

Concerned aboutConcerned aboutUnlimited & insatiable desires ofUnlimited & insatiable desires of

human beingshuman beings

Scarcity of economic resources toScarcity of economic resources tosatisfy these human wantssatisfy these human wants


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ScarcityScarcity

ScarcityScarcity is the condition in whichis the condition in whichresources are not available to satisfyresources are not available to satisfyall the needs and wants of aall the needs and wants of aspecified group of people.specified group of people.


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Decision MakingDecision MakingEconomicsEconomics is the study of theis the study of the

behavior of human beings inbehavior of human beings inproducing, distributing andproducing, distributing andconsuming material goods andconsuming material goods andservices in a world of scarceservices in a world of scarceresources. (McConnell, 1993)resources. (McConnell, 1993)


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Decision MakingDecision MakingManagementManagement is the discipline ofis the discipline of

organizing and allocating a firmsorganizing and allocating a firmsscarce resources to achieve itsscarce resources to achieve itsdesired objectives.desired objectives.

Involves the ability to organize andInvolves the ability to organize andadminister various tasks in pursuit ofadminister various tasks in pursuit of

certain objectives.certain objectives.


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Economics helps in various mattersEconomics helps in various matters

of decision making:of decision making:Production decisionsProduction decisions--what towhat to

produce? How much of a good toproduce? How much of a good toproduce?produce?

Exchange decisionsExchange decisions--what price towhat price tocharge for a particular good? Tocharge for a particular good? Towhom to sell?whom to sell?

Consumption decisions: What toConsumption decisions: What toconsume? How much to consume?consume? How much to consume?


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All these questions involve the problem ofAll these questions involve the problem ofallocation of scarce resources amongallocation of scarce resources amongcompeting ends.competing ends.

E.g. what to produce involves allocation ofE.g. what to produce involves allocation oflimited funds among alternativelimited funds among alternativeinvestment projects, what and how muchinvestment projects, what and how muchof various goods to consume, requiresof various goods to consume, requiresdistribution of scarce resources.distribution of scarce resources.

Therefore, economics is considered to be aTherefore, economics is considered to be ascience of choice makingscience of choice making


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Thus, the science of economics is basicallyThus, the science of economics is basicallyconcerned with the problem of allocationconcerned with the problem of allocationof scarce resources among competingof scarce resources among competing

ends.ends. Clubbed together becomes ManagerialClubbed together becomes Managerial

Economics.Economics.

Viewed in this way, it may be taken asViewed in this way, it may be taken as

economics applied to problems of choiceeconomics applied to problems of choiceor alternatives and allocations ofor alternatives and allocations ofresources by the firms.resources by the firms.


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Defining Managerial EconomicsDefining Managerial Economics

Spencer & Siegelman defines ME as TheSpencer & Siegelman defines ME as Theintegration of economic theory withintegration of economic theory withbusiness practice for the purpose ofbusiness practice for the purpose of

facilitating decision making & forwardfacilitating decision making & forwardplanning by management.planning by management.

Alongwith economic theory, managerialAlongwith economic theory, managerialeconomics includes integration of decisioneconomics includes integration of decisionsciences as well.sciences as well.


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Broad definitionBroad definition

Managerial economics refers to theManagerial economics refers to theapplication of economic theory andapplication of economic theory andthe tools of decision science tothe tools of decision science toexamine how an organisation canexamine how an organisation canachieve its aims or objectives mostachieve its aims or objectives mostefficiently.efficiently.


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Definition explained with a figure:Definition explained with a figure:

Management Decision problems

Economic Theory:Microeconomics,Macroeconomics

Decision Sciences:Mathematical Economics

Econometrics

MANAGERIAL ECONOMICS:

Application of economic theory and decision science tools to solvemanagerial decision problems

Optimal Solution toManagerial Decision Problems


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Explaining the modelExplaining the model

Managerial decision problems canManagerial decision problems canarise in any organisation be it a firm,arise in any organisation be it a firm,a nona non--profit organisation (hospital orprofit organisation (hospital oruniversity)university)--or a government agencyor a government agency--when it seeks to achieve some goalwhen it seeks to achieve some goalor objective subject to someor objective subject to some

constraints.constraints.


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ExampleExample

A firm may seek to maximise profits subject toA firm may seek to maximise profits subject tolimitations on the availability of essential inputs.limitations on the availability of essential inputs.

A hospital may seek to treat as many patients asA hospital may seek to treat as many patients as

possible at an adequate medical standard withpossible at an adequate medical standard withits limited physical resources (physicians,its limited physical resources (physicians,technicians, nurses, equipment, beds) andtechnicians, nurses, equipment, beds) andbudget.budget.

The goal of a state university may be to provideThe goal of a state university may be to provide

an adequate education to as many students asan adequate education to as many students aspossible, subject to the physical and financialpossible, subject to the physical and financialconstraints it faces.constraints it faces.


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In all these cases, the organisationIn all these cases, the organisationfaces management decisionfaces management decisionproblems asproblems as it seeks to achieve itsit seeks to achieve itsgoal or objective, subject to thegoal or objective, subject to theconstraints it faces.constraints it faces.

The goal and constraints may differThe goal and constraints may differfrom case to case, but the basicfrom case to case, but the basicdecisiondecision--making process is the same.making process is the same.


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Relationship to Economic TheoryRelationship to Economic Theory

These management decision problems canThese management decision problems canbe be solved by the application ofbe be solved by the application ofeconomic theory and tools of decisioneconomic theory and tools of decision

science.science. Economic theory comprisesEconomic theory comprises

microeconomics and macroeconomics.microeconomics and macroeconomics.

MicroMicro comes from Mikros (greek)comes from Mikros (greek)--smallsmall

MacroMacro comes from Makros (greek)comes from Makros (greek)--largelarge


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Micro Vs MacroMicro Vs Macro

Microeconomics refers to the study of theMicroeconomics refers to the study of theeconomic behaviour ofeconomic behaviour of individual decisionindividual decision--makingmaking units such as individuals, businessunits such as individuals, businessfirms, consumer and producer. It is atfirms, consumer and producer. It is at unitunit

level.level. Macroeconomics is the study of theMacroeconomics is the study of the totaltotal

or aggregateor aggregate level of output, income,level of output, income,investment, consumption and prices forinvestment, consumption and prices forthe economy as a whole.the economy as a whole.

It studiesIt studies behaviour at aggregate levelbehaviour at aggregate levele.g.National Income, GNP, totale.g.National Income, GNP, totalemployment, BOT etc.employment, BOT etc.


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Although the (microeconomic) theory ofAlthough the (microeconomic) theory ofthe firm is the single most importantthe firm is the single most importantelement in managerial economics, theelement in managerial economics, the

general macroeconomic conditions of thegeneral macroeconomic conditions of theeconomy (such as level of aggregateeconomy (such as level of aggregatedemand, rate of inflation, and interestdemand, rate of inflation, and interestrates) within which the firm operates isrates) within which the firm operates is

also very importantalso very important..


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Managerial Economics is basicallyManagerial Economics is basically

considered to be appliedconsidered to be appliedmicroeconomics (applicationmicroeconomics (application

of microeconomic principles toof microeconomic principles to

decisiondecision--making by firms.making by firms.


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Economic theories seek to predictEconomic theories seek to predictand explain economic behaviour.and explain economic behaviour.--under some assumptions.under some assumptions.

This abstracts from the many detailsThis abstracts from the many detailssurrounding an event and seeks tosurrounding an event and seeks toidentify a few of the most importantidentify a few of the most important

determinants of the event. e.g law ofdeterminants of the event. e.g law ofdemand, theory of firm.demand, theory of firm.


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Law of Demand helped to analyse howLaw of Demand helped to analyse howquantity demanded changes with changequantity demanded changes with changein price.in price.

Theory of firm seeks to maximise profitsTheory of firm seeks to maximise profitson that basis it predicts how much of aon that basis it predicts how much of aparticular commodity the firm shouldparticular commodity the firm shouldproduce under different forms of marketproduce under different forms of marketstructures.structures.

Thus, the methodolgy of economics is toThus, the methodolgy of economics is toaccept a theory or model if it predictsaccept a theory or model if it predictsaccurately and if the predictions followaccurately and if the predictions followlogically from the assumptions.logically from the assumptions.


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Relationship to Decision Sciences:Relationship to Decision Sciences:

Managerial Economics is also closelyManagerial Economics is also closelyrelated to the decision sciences.related to the decision sciences.

It utilises the tools of mathematicalIt utilises the tools of mathematicaleconomics and econometrics toeconomics and econometrics toconstruct and estimate decisionconstruct and estimate decisionmodels aimed at determining themodels aimed at determining theoptimal behaviour of the firm (i.e.optimal behaviour of the firm (i.e.how the firm can reach its goalshow the firm can reach its goalsmost efficiently.most efficiently.


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Mathematical EconomicsMathematical Economics is used tois used toformalise ( to express in equationalformalise ( to express in equationalform) the economic modelsform) the economic modelspostulated by economic theory.postulated by economic theory.

EconometricsEconometrics then applies statisticalthen applies statisticaldata to estimate the modelsdata to estimate the models

postulated by economic theory andpostulated by economic theory andforecasting.forecasting.


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Example.Example.

Economic theory states that quantityEconomic theory states that quantitydemanded (Q) of a commodity is ademanded (Q) of a commodity is afunction of or depends on the pricefunction of or depends on the price

of the commodity (P), the income ofof the commodity (P), the income ofconsumers (Y) and the price ofconsumers (Y) and the price ofrelated (i.e. complementary andrelated (i.e. complementary andsubstitute) commodities Pc and Pssubstitute) commodities Pc and Ps

respectively.respectively.Q=f(P,Y,Pc,Ps)Q=f(P,Y,Pc,Ps)


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By, collecting data on Q,P,Y, for aBy, collecting data on Q,P,Y, for aparticular commodity, we canparticular commodity, we canestimate the empirical relationship.estimate the empirical relationship.This will permit the firm to determineThis will permit the firm to determinehow much Q would change by ahow much Q would change by achange in P,Y, Pc and Ps, and tochange in P,Y, Pc and Ps, and to

forecast the future demand for theforecast the future demand for thecommodity.commodity.


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Relationship to the Functional AreaRelationship to the Functional Area

ofBusiness Administration studies:ofBusiness Administration studies:

The functional areas of businessThe functional areas of businessadministration studies includeadministration studies includeaccounting, finance, marketing, HRMaccounting, finance, marketing, HRM

and production.and production.These disciplines study the businessThese disciplines study the business

environment in which the firmenvironment in which the firmoperates and provide the backgroundoperates and provide the backgroundfor managerial decision making.for managerial decision making.


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Thus, ME can be regarded as anThus, ME can be regarded as anoverview course that integratesoverview course that integrateseconomic theory, decision scienceseconomic theory, decision sciencesand the functional areas of businessand the functional areas of businessadministration studies and examinesadministration studies and examineshow they interact with one anotherhow they interact with one another

as the firm attempts to achieve itsas the firm attempts to achieve itsgoal most efficiently.goal most efficiently.


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Relationship to other business disciplinesRelationship to other business disciplines

Marketing:Marketing: Demand, Price ElasticityDemand, Price Elasticity

Finance:Finance: Capital Budgeting, BreakCapital Budgeting, Break--EvenEven

Analysis, Opportunity Cost,Analysis, Opportunity Cost, Management Science:Management Science: Linear Programming,Linear Programming,

Regression Analysis, ForecastingRegression Analysis, Forecasting

Strategy:Strategy: Types of Competition,Types of Competition,

Managerial Accounting:Managerial Accounting: Relevant Cost,Relevant Cost,BreakBreak--Even Analysis, Incremental CostEven Analysis, Incremental CostAnalysis, Opportunity CostAnalysis, Opportunity Cost

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103+Managerial+Economics+1