MANAGERIAL ECONOMICS MODULE 1 BY Mr. Anirban Christ College Institute of Management Bangalore
What is an Economy? Economy refers to the conditions under which goods are produced in a country and the manner in which the people are gainfully employed. The essential processes of an economy are production, Consumption and investment. There are different ways of classifying economies… Capitalistic or Mixed Economy Developed & Underdeveloped Economy Agricultural & Industrial Economy
Planned & Unplanned Economy etc…
What is Economics? Economics is concerned with the allocative decisions of individuals, Households, business & other economic agents operating in the society & how the society as a whole allocate its resources. Economics in the science which studies human behaviour as a relationship between ends & scare means which have alternative uses.
The Field of economics is divided into 2 broad fields:
Micro & Macro Economics Micro economics can be defined as the study of how household and firm make decisions and how they are interact in specific markets.
Macro economics is the study of economy wide phenomena; It deals with the factors which determine national output & employment, the general price level, total spending and saving in the economy, total imports & exports and the demand for and the supply of money and other financial assets.
Meaning of Managerial Economics ME is the integration of economic theory & business practice for the purpose of facilitating decision making and forward planning. It is the branch of economic theory which analyses the problems of business decision making. So it is concerned with the application of economic theory to business management & lies in the borderline of economic theory & business management and provide a bridge between the two.
Also known as business economics or applied economics.
Characteristic features of Managerial Economics Concerned with decision making of economic theory. Normative (what ought to be) rather than positive. (what is, was & will be) Micro economic in nature. Conceptual & Metrical (help of quantitative techniques) Provide a link between decision science & traditional economics.
Contents based on mainly theory of the firm.
Scope of Managerial Economics The scope of M.E. is narrower than that of Economic theory, as it includes both micro and macro, and M.E. includes only a part of Micro Economics. M.E. concerned with only those aspects which are connected with the firm, and profit theory in the distribution part. It is a new & developing concept, so it has no defined scope but its scope is increasing day by day. The various aspects describe below represents the major areas in which manager have to take decisions.
So the subject matter of M.E. consists of applying economic principles & concepts in the decision making by the management of the business firm.
Scope Contd…. M.E. deals with the following subjects: Demand & Supply management Cost and Production Analysis Pricing decisions, policies & practices
Policy, Sales promotion & Market strategy
Role of Managerial Economist Economic Analysis of the business Security management analysis Foreign exchange management Pricing & the related decisions
Analyzing and forecasting environmental factors.
Role of Managerial Economist, Contd…. General Economic Condition (Level & rate of growth of N.I., Regional income distribution, Influence of international factors on the domestic economy, Business Cycle etc…) Market conditions of the raw materials and finished goods. Firm’s share in the market. Government & Economic policies. Pricing & Profit decisions.
Production, Cost & Investment schedule.
Responsibilities of Managerial Economist Objectives of managerial economics must coincide with that of business. Accuracy in forecast and estimates. Timeliness and responsiveness of changes in external and internal factors. Ability to obtain necessary information through personal contacts and obscure reference sources.
Readiness to take up challenging tasks.
Basic Concepts & Precepts: The opportunity cost if anything is the next best alternative, that could be produced instead by the same factors or by an equivalent group of factor, costing the same amount of money. For example, a firm wants to produce more of good X then it will produce less of good Y; Thus providing a greater amount of X has opportunity cost of producing Y less. The opportunity cost may be of two types, Implicit Cost ( Which not actually incurred but would have been incurred in the absence of self owned factors. Explicit costs (Actually incurred costs) Since it consists of both explicit and implicit cost of an alternative so, it is generally higher than the accounting cost.
This concept can be used in the decision involving, allocation of scare resources
Basic Concepts & Precepts: Incremental cost are the added cost of a change in the nature or the level of activity. The 2 basic concepts of Incremental analysis are, I.C. can be defined as the change in the total cost as a result of change in the level of output, investment etc… I.R. is the change of total revenue resulting from the change of output, price etc…
The managers target should be always I.R. should be greater than the I.C, while taking decisions.
Basic Concepts & Precepts: Economists often makes a distinction between short run and long run Short run can be defined as that time period, with in that some inputs (called fixed inputs), can not be altered. Thus in short run change in the output can be achieved by changing the intensity of use of the fixed inputs. In the long run all the inputs can be altered.
Thus in the long run change in the output can be achieved by adjusting the scale of output, size of the firm, etc…
Basic Concepts & Precepts: It is the extension of time perspective and it is based on the principle that as future is full of risk and uncertain, the return in future is less attractive than the same return today. The future there fore must be discounted both for the elements of delay, risk and uncertainty. The concept of discounting future is based on the fundamental fact that, a rupee earned now is worth more than the a rupee earned a year after, even if there will be a certain future return, yet it must be discounted because to wait for future implies a sacrifice for the present. Let a sum of Rs 100 is due after 1 year; rate of interest is 10%; Then we can determine the sum to be invested so as to produce the return ® of Rs 100 at the end of 1 year.
The present value or the discounted value of Rs 100 will be,
Basic Concepts & Precepts: The term marginal is used for all such additional magnitudes of output or return. Firm : (An organization carrying on economic activities like production, distribution and marketing of goods and services with the view point of profit.) Market : (Meeting place of buyers & sellers, directly or indirectly)
Scarcity: (Demand > Supply)