Introduction to Managerial Economics-Yuvaraja SEPresentation Transcript
Branch of Economics .
‘ Managerial Economics is the study of Economic Theories, Principles and Concepts which is used in Managerial Decision Making. ’
‘ Managerial Economics is the Application of various Theories, Concepts and Principles of Economics in the Business Decisions. ’
It also Includes ‘The Application of Mathematical and Statistical tools in Management decisions.’
Managerial Economics Economic Theories, Principles and Concepts. Managerial Decision Making. Application Application Application of Mathematical And Statistical tools
Managerial Economics Managerial Decisions Choice of product Choice of production method Choice of price, Etc… Managerial Economics ‘ Application of Economic Concepts, Theories and Analytical tools to find solutions for managerial problems. Application of Economic concepts, Theories and Principles in decision Making Application of Analytical tools such as, Mathematical and Statistical tools
Selection of best alternative out of various possible alternatives.
Risk & Uncertainty
Economics: ‘A Queen of Social Sciences ’
Economics ‘OIKOS’ ‘NOMOS’ (Greek Words)
‘ OIKOS’ ‘HOUSE’
‘ NOMOS’ ‘MANAGEMENT’
According to J.S. Mill Economics is “The practical science of production and distribution of wealth.”
‘ It is the study of How people produce and spend income .’
It talks about ‘Economic Activity’ and ‘Economic Problem’.
‘ It is the Study of Logic choice between Scarce resources and unlimited wants’
‘ Economics is to get the answer to the basic questions of an economy such as, What to produce?, How to produce? And for whom to produce?’
‘ Economics is the social science that is concerned with the production, distribution, and consumption of goods and services.’
There are Two Branches
Micro Economics: Means ‘Small’ or ‘Individual’ .
The term ‘MICRO’ comes from the Greek word
‘ MIKROS’ Which means ‘Small’ or ‘Individual’.
Macro Economics: Means ‘Group’ or ‘Whole’.
The term ‘MACRO’ comes from the Greek word ‘MAKROS’ Which means ‘Large’ or ‘Whole’.
Micro Economics: ‘It is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular industries.”
Some of the theories which come under Micro Economics,
Theory of Individual/Market Demand.
Theory of Production and Cost.
Theory of Markets and price.
Theory of profit, Etc…
Macro Economics : ‘It deals not with individual quantities as such but with aggregates of these quantities, not with individual incomes but with national income.’
Some of the theories which come under Macro Economics,
Theory of total output and employment.
General price level.
Theory of Inflation.
Theory of trade cycles
Economic growth, Etc…
Difference between Managerial Economics and Economics
Comprehensive and wider scope
It has both Micro and Macro in nature
It is both Normative and positive science
It is concerned with the formulation of theories and principles
It discusses general problems
Narrow and limited scope
It is essentially Micro in nature and Macro in analysis
It is mainly a Normative science
It is concerned with the application of theories and principles of economics
It discusses Individual problems
Nature of Managerial Economics
Science as well as Art of decision making.
It is essentially Micro in nature but Macro in analysis.
It is mainly a Normative science but positive in analysis.
It is concerned with the application of theories and principles of economics.
It discusses Individual problems.
It is dynamic in nature not a Static.
It discuss the economic behavior of a firm.
It concentrates on optimum utilization of resources.
Scope of Managerial Economics
Objectives of a Firm.
Demand Analysis and Forecasting.
Production and cost analysis.
Inflation and economic conditions.
Managerial economics and Decision Making
Decision making on internal affairs .
Decision making on external affairs .
Internal affairs talk on internal environment which consists of internal factors such as, Production, Financial, Marketing and Human resource related decisions.
External Affairs talk on external environment which consists of external factors such as, PEST related decisions.
Nothing can be expectable because of the constant changes in the environment both internally as well as externally.
It is the situation which comes under uncertainty.
How to take decision????????????
is the structural and scientific method of constructing or developing Solutions by using basic economic principles , concepts, theories and Quantitative techniques such as mathematical and statistical tools .
Steps to construct Economic Models
Defining the problem
Formulation of hypothesis
Analysis of data using Basic Principles of economics and Quantitative Techniques .
Testing of Hypothesis
Conclusion for decisions .
Basic Principles of Managerial Economics
Opportunity cost principle.
Time perspective principle.
Opportunity Cost Principle
Choice involves sacrifice.
The cost involved with the sacrifice
It is the cost of an next best opportunity which is lost will be called as Opportunity cost.
Ex: 100 Rs can be used for purchasing book or eating in pizza corner or purchasing of stationeries.
Now the cost of purchasing book is also include the cost of ‘Eating pizza.’
Opportunity Cost in Management
A Production possibility curve
C X C1 Y
O D D1 B
Marginal cost is the cost which incurred to produce the next or one more unit.
Marginal Revenue is the benefit which gets by producing one more or next unit.
Cost will be less and benefit will be more.
Marginal cost (MC)= (TC) n - (TC) n- 1
Marginal Revenue(MR)=(TR) n – (TR) n-1
Decision Rule :
MR > MC…..MR=MC…..MR<MC
Allocation of scarce resources on different alternative uses should be equally distributed.
i.e.. MPa = MP b = MPc =MPd
MPa = MP b = MPc = MPd
COPa COPb COPc COPd.
Incremental principle gives an idea to increase the production not only with one more product it could be any quantity till the profit exists.
According to this principle profit can be existed either by increasing sales or total revenue or by decreasing total cost
i.e. TC<TR…… TC=TR …… TC>TR
Time Perspective Principle
According to the principle all decisions should be under two formats i.e. short run and long run, Because of the decisions characteristics.
So each decision should be made in Short run basis as well as long run basis.
According to short run decision the long run decision will get change.
According to this principle, if a decision affects costs and revenues in long-run, all those costs and revenues must be discounted to present values before valid comparison of alternatives is possible. This is essential because a rupee worth of money at a future date is not worth a rupee today. Money actually has time value.
This could be understood using the formula,
FV = PV*(1+r) t And
PV = FV/ (1+r) t
Where, FV is the future value, PV is the present value, r is the discount (interest) rate, and t is the time between the future value and present value.
Quantitative Techniques used in Managerial Economics