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ECONOMICSEconomic ProblemsManagerial EconomicsScope and Nature of Managerial Economics

ECONOMICS

1. Analyzes how a society’s institutions and technology affect prices and the allocation of resources among different uses.

2. Explores the behavior of the financial markets, including interest rates & stock prices.

3. Examines the distribution of income & suggests ways that the poor can be helped without harming the performance of the economy.

4. Studies the business cycle and examines how monetary policy can be used to moderate the swings in unemployment and inflation.

ECONOMICS

5. Studies the patterns of trade among nations and analyzes the impact of trade barriers.

6. Looks at growth in developing countries and proposes ways to encourage the efficient use of resources.

7. Asks how government policies can be used to pursue important goals such as rapid economic growth, efficient use of resources, full employment, price stability and a fair distribution of income.

Classification of Human Wants

• On the basis of degree of urgency wants are classified into three groups*:1. Necessaries

(a) Necessaries for life-Physiological needs.(b) Necessaries for efficiency-Goods which promote the ‘work efficiency’ .Books for a teacher, tools for a carpenter increases the efficiency. ( c) Conventional Necessaries-Desired due to social customs or force of habit. During marriages, festivals or funerals

2. Comforts-Goods and services which make life easy, comfortable and pleasant.

3. Luxuries- Consumed for their ‘snob-appeal’. Considered as the symbol of prestige in the society.

“Bread is not free”Nothing is free’. Man has wants and he has tosatisfy them. It means he has to purchase themfrom the market by paying a price. It means he has to earn money by making some effort. Therefore, he has to work and labour hard for satisfying his various wants.

• “Getting many in ten”The man has many wants. But the money at his disposal is very limited. So

it is common but complex problem.

ECONOMICS IS THAT BODY OF PRINCIPLES AND METHODS WHICH HELPS THE MAN TO MAKE THE BEST UTILISATION OF THE AVAILABLE SCARCE RESOURCES.

Economic Problems

• The problem of scarcity is the problem of “Economics”. When there is ‘scarcity’ of resources, there is the necessity of making a “wise choice”.

• When there is a problem of “insufficiency” of certain thing, there is the need of “proper allocation”. Therefore a problem pertains to the branch of Economics only when there is the necessity of making a “wise choice” or a “proper allocation”. Thus an economic problem always deals with ‘inadequacy’ or ‘scarcity’ of means.

• It is concerned with the rational ‘choice or allocation’ of scarce means of all economic agents.

Central Problem of Economics

The problem of ‘scarcity and choice’ gives rise to three different economic problems, they are:

What to produce? The problem of allocation How to produce? The problem of choosing appropriate

production technique. For whom to produce? The problem of factor prize

determination.

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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 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?

Positive versus Normative Analysis

• Positive economics predicts the consequences of alternative actions, answering the questions, “What is?” or “What will be?”

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Positive versus Normative Analysis

• Normative economics answers the question, What ought to be? Normative questions lie at the heart of policy debates.

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Scope of Managerial Economics• Managerial econ is based on microeconomics.• Microeconomics

• Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.

• Macroeconomics • Macroeconomics is the study of the economy as a

whole.

Scope of Managerial Economics

Micro Macro

Theory of demand

Theory of Production

Analysis of marketstructure

Profit analysis&

Manag.

Theory of capital and Investment

Manag.

Issue related to macro variables

Issue related to Foreign trade

Issue related to Govt. policies

EXAMPLE: INCREASE IN OIL PRICE• Micro effect: vehicle users, electronic power

generators • Macro effect: inflation, unemployment

NATURE OF MANAGERIAL ECONOMICS

Managerial Economics is supposed to enrich the conceptual & Technical skill of a manager facing business decision problems.

Managerial Economics is the application of economic analysis to evaluate business decisions.

Constantly matching ends to means i.e EconomicOptimal Economic Activity is to maximize the

attainment of ends, given the scarce means, & to minimize the use of resources.

Decision - making by Management is truly economic in nature -Involves choice from among a set of alternatives.

Relationship to other business disciplines

• Marketing: Demand, Price Elasticity• Finance: Capital Budgeting, Break-Even Analysis,

Opportunity Cost, Economic Value Added• Management Science: Linear Programming, Regression

Analysis, Forecasting• Strategy: Types of Competition, Structure-Conduct-

Performance Analysis• Managerial Accounting: Relevant Cost, Break-Even Analysis,

Incremental Cost Analysis, Opportunity Cost

MANAGERIAL BUSINESS DECISIONS

Financial decisions: i.e costing, budgeting, accounting, auditing, tax planning, portfolio composition, dividend distribution etc.

Production decisions: Quantity & quality of product, choice of technology, product-mix, plant location & layout, production scheduling, maintenance, pollution control etc.

Personnel Decisions: Recruitment, selection, training, placement, promotion, transfer, retirement etc.

Marketing decisions: Sales volume, sales force, sales promotion, marketing research, customer service, packages, advertising etc.

Miscellaneous decisions: Residuary items like purchasing, inventory control, information system, data processing, public relations etc.

All Managerial decisions are economic in nature & involve some degree of choice.

Bibhakar