Managerial Economics and managerial decision making

1. By: NaseerAhmed
University of Balochistan Quetta.

2. MANAGERIAL ECONOMICS AND
MANAGERIAL
DECISION MAKING Economics is “the study of the behavior of
human beings in producing, distributing and
consuming material goods and services in a
world of scarce resources.”

3. ECONOMICS AND
MANAGERIAL
DECISION MAKING
 Management is the discipline of organizing and
allocating a firm’s scarce resources to achieve its
desired objectives. Involves the ability to
organize and administer various tasks in pursuit of
certain objectives.

4. INTRODUCTION TO ME
How does managerial economics differ from “regular”
economics?
There is no difference in the theory; standard economic
theory provides the basis for managerial economics.
The difference is in the way the economic theory is applied.

5. DEFINITIONS OF MANAGERIAL
ECONOMICS
 Integration of economic theory with
business practice for the purpose of
facilitating decision making and
forward planning by management. –
Prof. Spencer Sigelman.
 The purpose of Managerial
economics is to show how economic
analysis can be used in formulating
business policies – Prof. Joel Dean

6. ECONOMICS AND
MANAGERIAL
DECISION MAKING
 Managerial economics is the use of economic
analysis to make business decisions involving the
best use (allocation) of an organization’s scarce
resources.
 Managerial economics is (mostly) applied
microeconomics.

7. MANAGERIAL ECONOMICS DEALS
WITH
“How decisions should be made by managers to achieve
the firm’s goals - in particular, how to maximize profit.”
(Also government agencies and nonprofit institutions
benefit from knowledge of economics, i.e. efficient
recourse allocation is important for them too...)

8. MICRO AND
MACROECONOMICS
 2 major branches of
economics
 Micro – derived for Greek
word micros meaning small
 Macro – derived form Greek
word macros means
aggregative – whole – large

9. MICROECONOMICS
 Branch of economics which is concerned with
analysis of behaviour of the individual
economic units or variables such as an
individual consumer or a producer or the price
of a particular product.
 Basically deals with individual decision making
and the problem of resource allocation.
 Examines in particular as to how individual
consumers and producers behave and how
their behaviors interact

10. IMPORTANCE AND USES OF
MICROECONOMICS
 Explains price determination and allocation of
resources
 Direct relevance in business decision making
 Serves as a guide for business/ production
planning
 Serves as a basis for prediction
 Useful in determination of economic policies of
the government
 Serves as the basis for welfare economics
 Explain the phenomena of international trade

11. MACROECONOMICS
 Branch of economics which deals with the
aggregate behaviour of the economy as
a whole
 Macroeconomics is essentially aggregate
economics
 Study of economic system in general
 Study of very large, economy – wide
aggregate variables like national income,
total savings, total consumption, total
investment, money supply,
unemployment, price levels, economic
growth rate etc.

12. IMPORTANCE OF
MACROECONOMICS
 Explains the working of the economy as a whole
 Knowledge is indispensable for policy makers
 Useful for the planner for preparing economic
plans for the country’s development
 Helpful in international comparison

13. DISTINCTION BETWEEN MICRO AND
MACROECONOMICS
MACRO -
 Study of aggregate
 Aggregate approach
 Variables – agg dd, agg ss,
price level etc
MICRO-
 Study of individual
 Individualistic approach
 Variables – indl dd,ss, price
etc.

14. REVIEW OF ECONOMIC TERMS
 Microeconomics is the study of
individual consumers and
producers in specific markets.
 Supply and demand
 Pricing of output
 Production processes
 Cost structure
 Distribution of income and output

15. REVIEW OF ECONOMIC TERMS
 Macroeconomics is the study of
the aggregate economy.
 National Income Analysis (GDP)
 Unemployment
 Inflation
 Fiscal and Monetary policy
 Trade and Financial relationships
among nations

16. REVIEW OF ECONOMIC TERMS
 Scarcity is the condition in which resources are
not available to satisfy all the needs and wants
of a specified group of people.

17. REVIEW OF ECONOMIC TERMS
 Resources are factors of production or inputs.
 Examples:
 Land
 Labor
 Capital
 Entrepreneurship

18. REVIEW OF ECONOMIC TERMS
 Opportunity cost is the amount or value that
must be sacrificed in choosing one activity over
the next best alternative.

19. ECONOMICS AND
MANAGERIAL
DECISION MAKING
 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

20. ECONOMICS AND
MANAGERIAL
DECISION MAKING
 Questions that managers must
answer:
 How can we maintain a competitive advantage
over our competitors?
 Cost-leader?
 Product Differentiation?
 Market Niche?
 Outsourcing, alliances, mergers,
acquisitions?

21. ECONOMICS AND
MANAGERIAL
DECISION MAKING
 Questions that managers must answer:
 What are the risks involved?
 Risk is the chance or possibility that actual future
outcomes will differ from those expected today.

22. ECONOMICS AND
MANAGERIAL
DECISION MAKING
 Types of risk
 Changes in demand and supply
conditions
 Technological changes and the effect of
competition
 Changes in interest rates and inflation
rates
 Exchange rates for companies engaged
in international trade
 Political risk for companies with foreign
operations

23. NATURE OF MANAGERIAL
ECONOMICS
 Managerial economics aims at providing
decision making to firms. It draws heavily on the
prepositions of micro economic theory that
studies the phenomenon at individual level i.e
behaviour of individual consumers, households
and firms.

24. NATURE OF MANAGERIAL
ECONOMICS
 The concepts of economics which ME frequently
uses are :
 Elasticity of demand.
 Marginal cost.
 Marginal revenue.
 Market structures and their significance in pricing
policies.

25. NATURE OF MANAGERIAL
ECONOMICS
 ME makes use of both Micro & Macro
economics. Micro economics assists the firm in
forecasting & macro economics studies the
aggregate levels. Macro economics indicates
the relationship between, for example, level of
consumption and national income, level of
national income and employment etc.

26. NATURE OF MANAGERIAL
ECONOMICS
 This helps the management in
knowing the level of demand at a
future period of time, based on the
relationship between the national
income and the demand for a
particular product.
 Eg : Demand for cars, televisions,
refrigerators etc can have a impact
of changes in the level of national
income.

27. NATURE OF MANAGERIAL
ECONOMICS
 ME is prescriptive in nature. It
recommends how a thing should be
done in alternative conditions.
 Eg: It may be derived from economic
analysis the it is more profitable to
produce 100 units of a particular
product by using 5 machines and 15
workers than using 2 machines and 25
workers.

28. NATURE OF MANAGERIAL
ECONOMICS
 ME uses a scientific approach. In practice some
firms may use simple rules based on past
experience. However, the quality of decisions
made can be improved by using a systematic
approach. This is achieved by the study of ME.

29. SCOPE OF ME
 The scope of ME is so wide that it touches almost
all areas of the manager’s decision making. It
deals with demand analysis, forecasting,
production function, cost analysis, inventory
management, resource allocation, capital
budgeting. A brief introduction to these areas
will give an idea of the scope of ME.

30. SCOPE OF ME
 Demand Analysis and forecasting :
 A correct analysis of the future demand
for a companies product enables a
manager to take decisions related to the
production scheduling & inventory
management.
 For this he has to consider things such as
income elasticity and cross elasticity.
 This process of accessing the future
demand is called as demand
forecasting.

31. SCOPE OF ME
 Production function :
 We know that resources are scarce and
have alternative uses. Inputs play a imp.
role in the economics of production.
 The factors of production should be
combined in a particular way to
maximize output.
 Alternatively, when the prices of some
inputs shoots up, a manager has to work
out a change in the use of inputs so as to
bring the total costs of production as low
as possible.
 Thus, production function helps ME.

32. SCOPE OF ME
 Cost analysis :
 Cost analysis talks of determinants of costs,
relationship between costs and output, forecast
of cost and profit etc. which is essential for
managerial decision making.

33. SCOPE OF ME
 Inventory management :
 Large capital of companies is blocked in
inventory. If this capital can be save, it can be
used for alternative production priorities.
 Tools like ABC analysis etc. help the managers in
deciding the levels of inventory.

34. SCOPE OF ME
 Pricing :
 The price of the product often
determines how much of what
product will be purchased.
 Merely knowing the cost of
production is not enough to set the
price. Various other aspects such as
the market conditions, conditions of
competition, various options
available for pricing also have to be
considered.

35. SUBJECT MATTER AND SCOPE OF
MICROECONOMICS
Microeconomics
Pricing
(Theory of value)
Distribution
(Factor Pricing)
Welfare (Welfare
economics)
Theory of
demand
Theory of
Production
Theory of
pricing
General Theory
of Distribution
Theories of
Rent Wages Interest Profits

36. THANK YOU