Managerial Economics

*Course contentIntroductionDemand theory and analysisUtility analysis, indifference curve & revealed preference theory analysis , price elasticityProduction functionCost functions, Market structuresPrice & Output decision under different market structures, Price discriminationIndian economy, industrial policy, other economic reforms- Estimation of national economy GDP, GNP,etc

Managerial Economics

Managerial Economics

*Economics is the study of the making, buying, and selling of goods or services.Managerial Economics

*When Mr. Ram was walking through town, he decided to go to Bubbas Ice Cream. His friend Diana works there. Diana provides a service to him because she serves me ice cream. A service is any kind of work performed for others. The ice cream is a good. A good is something you can feel, or any kind of merchandise.Managerial Economics

*Mr.Ram asked Diana for a double scoop of his favorite kind of ice cream: mint chocolate chip. I am sorry Ram, we are all out of that flavor, she said. Disappointed, he settled for vanilla.Managerial Economics

*Diana asked him if he would like his vanilla ice cream in a cup or a cone. Mr.Ram asked for a cone. Diana said he was lucky because there was only one more cone available. The little boy behind him in line wailed, I wanted my ice cream in a cone! Ram told Diana that the little boy could have the last cone, and that he would have his in a dish with chocolate syrup.Managerial Economics

*There was a scarcity of cones at Bubbas. Scarcity means that there are limited resources, and therefore, people must make choices. Look at the pictures on the right. Which pictures show a scarcity? Managerial Economics

*ECONOMICSIt is the social science that studies the production, distribution and consumption of goods & services.The science that studies human behaviour as a relationship between ends and scarce means which have alternative uses.Economics is all about dealing with: scarce resources and unlimited wants.This forces us to make choicesIn economics we try to learn how to make the best choices

Managerial Economics

Managerial Economics

**SCARCE RESOURCES, UNLIMITED WANTSEconomics studies the allocation of scarce resources in response to unlimited wants.Managerial Economics

**SCARCE RESOURCES, UNLIMITED WANTSEconomics studies the allocation of scarce resources in response to unlimited wants.Managerial Economics

**Economics is about choice. Society and individuals are forced to choose because resources are scarce.Scarce Resources, Unlimited WantsManagerial Economics

**When something is scarce we must choose.We make choices at the margin.At margin means incrementally, or in small steps.If I choose some thing it means that the marginal benefits are greater than the marginal costsMaking Decision at the MarginManagerial Economics

**ResourcesResource allocation refers to the uses to which resources are put.How resources are used depends partly upon technology.New technology can help us get more from our resources (exp. Agriculture).Allocation of resources is the choice of what to produce.

Managerial Economics

**Examples of Choices at the MarginChoices Faced by a Consumer:Should I eat the last slice of Pizza?What is the best use of the next hour of time?How should I spend the last dollar in my pocket?Managerial Economics

**Examples of Choices at the MarginChoices Faced by a Business:Should revenues be used to hire another worker or to upgrade the office computer system?Should one more item be added to a restaurants menu? Should one be deleted?Should the restaurant stay open one hour later, or close an hour earlier?Managerial Economics

**Examples of Choices at the MarginChoices Faced by Government:Should we need to change the policy?Should a new elementary school be built?How badly does a city need another water plant?Managerial Economics

Managerial Economics*

Managerial decision areas Assessment of investable fundsSelecting business areaChoice of productDetermining optimum output, price of the productDetermining input-combination and technologySales Promotion

Applications of Economic Concepts, Theories in Decision Making Use of Quantitative techniquesMathematical toolsStatistical ToolsEconometricsManagerial EconomicsApplications of Economic Concepts, Theories and analytical tools to find optimum solutions to business problems

Example 1: Reliance Industries has maintained top position in polymers by building a world-scale plant and upgrading technologyThis has resulted in low operating costs due to economies of scale. RPL registered a net profit of Rs. 726 crores on sales of Rs. 14,308 crores for the 6-months ended Sept, 2000. Of these, exports amounted to Rs 2,138 crores, which make RPL Indias largest manufacturer and exporterThe overall economies of scale are in favour of expansion. This expansion will further consolidate the position of RPL in the sector and help in warding off rivals*

Example 2: Leading multinational players like Samsung, LG, Sony and Panasonic cornered a large part of Indian consumer durables market in the late 1990s. This was possible because of global manufacturing facilities and investment in technologies. To maintain their market share, they resorted to product differentiation.These companies introduced technologically advanced models with specific product features and product styling.*

Example 3: For P&G, the 1990s was a decade of value-oriented consumer. The company formulated policies in view of emergence of India as value for money product market. This means that consumers are willing to pay premium price only for quality goodsCustomers are becoming more price-sensitive and quality consciousmore focussed on self satisfactionIt can, therefore, be said that consumer preferences and tastes have come to play a vital role in the survival of Companies*

In all the above examples, decision making has primarily been economic in nature as it involves an act of choice. The decision of Reliance Industries to build a plant of international scale and to further expand capacity was made on the basis of the law of returns to scale and economies of scale*

Similarly, the MNCs in the consumer durables market in India emphasised on global manufacturing facilities coupled with product differentiation to capture and maintain a major portion of market share*

EconomicsThe economics derived from the Greek wordOikos: a house & nomos: managereconomics = prudent management of ones house hold affairs!But, today it has come to mean the study of business affairs in general. economics is study of managing maximum gains out of scarce resources*

ManagementThe organization and coordination of the activities of an enterprise in accordance with certain policies and in achievement of defined objectives.*

Management + EconomicsManagerial Economics*

DefinitionM.E. is a discipline that combines economic theory with managerial practice. It bridges the gap between the problems of logic that intrigue economic theorists and the problems of policy that plague practical managers!!*

DefinitionIt enriches the analytical skills, helps in the logical structuring of problems, and provides adequate solution to the economic problems*

DefinitionManagerial Economics is concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions. Mansfield*

Definitionthe integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. Spencer and Siegelman*

DefinitionManagerial Economics is concerned with the application of economic principles and methodologies to the decision making process within the firm. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management. Douglas*

Definitions- Managerial economics applies economic theory and methods to business and administrative decision-making.- Pappas & Hirschey 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. -Salvatore

DefinitionManagerial Economics may be considered as economics applied to problems of choice or alternatives & allocation of scarce resources by the firms*

Key points of definitionDecision makingEconomic methodologyEconomic goals of firm*

Decision makingthe primary role of M.E. in decision-making is evaluating the implications of alternative course of actions and choosing the best among several alternatives open to the firm.*

Economic Methodology It is a relation between ideas , thoughts , intuitions & experience combined with economic tools & techniques*

Economic goals of firmmaking maximum gains out of available resources!!!*

Scopes of managerial economicsMicro when something is concerned with individual (person, firm or household)Macro something related to the environment as a whole*

Scopes of managerial economicsMicroeconomics is concerned with the study of individuals like a consumer, a commodity, a market, a producerMacroeconomics is the study of economy as a whole. It deals with national income, unemployment, inflation, fiscal policies and monetary policies*

MicroeconomicsMicroeconomics is generally the study of individuals andbusiness decisions.Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. Also takes into account taxes and regulations created by governments, focuses onsupply and demand and other forces that determine the price levels seen in the economy.E.g. microeconomics would look at how a specific company could maximize it's production and capacity soit could lowerprices and better compete in its industry.MacroeconomicsMacroeconomics looks athigher up country and governmentdecisions.Macroeconomics, is study of behaviour of the economy as a whole and not just on specific companies, but entire industries and economies, looks at economy-wide phenomena, such asGross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. E.g. macroeconomics would look at how an increase/decrease in net exports would affect a nation'scapital account or how GDP would be affected by unemployment rate.

Micro& Macro Economics Both are interdependent and complement one another.E.g. increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public. The bottom line is that microeconomicstakes abottoms-up approachto analyzing the economy while macroeconomicstakes atop-down approach. Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand howcompanies operate and earn revenuesand thus, how anentire economy ismanaged and sustained.

Micro economic theories Operational issues Theory of productionTheory of price determination Theory of profit & capital budgeting Theory of demand *

Macro economic theories Environment or external issues Theories of national incomeTheories of economic growth & fluctuationsTheories of national trade & monitory mechanismTheories of government policies*

Why Managerial Economics?A powerful analytical engine.A broader perspective on the firm.what is a firm?what are the firms overall objectives?what pressures drive the firm towards profit and away from profitThe basis for some of the more rigorous analysis of issues in Marketing and Strategic Management.

*Managerial Economics

Managerial Economics

Why do managers need to know managerial economics?What to produce?How to produce?For whom to produce?How much to produce? ..so that organization can generate maximum gains!ANDeconomics has the answer to all these problems*

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economic theories are too theoretical to be applied directly to the business decision making BUTwhen knowledge, logic & analytical tools are added to these theories it becomes managerial economics which helps the manager in rational business decision making*

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A firm has to allocate the available resources among various activities of the unitResource constraints can be in form of limited supply of men, materials, machines, money and managerial abilityFollowing examples illustrate this point:*

1. Production manager of Asian Paints may face a choice making decision of producing paints for domestic or industrial use, due to scarcity of titanium dioxide2. Marketing manager of Maruti Udyog has to decide whether to push up sales of Alto or Wagon R or Gypsy in view of limited advertisement outlay*

3. Personnel manager of Titan Watches has to decide whether to employ skilled labour on a contract basis or to hire them on daily wages4. The finance manager of a hospital may face the problem of allocation of limited budget between paediatric, surgery and orthopaedics departments*

5. A management institute may strive to maximise the value of teaching and research outputs subject to an annual budget constraint6. The technological constraints may set the physical limits on the productivity that can be achieved by a particular machine, or workers employed by production manager of Videocon Intl.*

Step 1: Establish the objectives Step 2: Define the problem Step 3: Identification of alternativesStep 4: Selection of best alternative Step 5: Implement the decision Decision Making process involves the following steps:*

Objectives of business firm*

Profit!*

Profit Profit means different things to different peopleExample- commission, salary, fees, etc. *

In economic terms profit means pure profit or economic profitEconomic profit - It is difference between actual earning & opportunity costOpportunity cost it is the expected income forgone from second best alternative *

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