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Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
Managerial Economics 2
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Managerial Economics 2


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  • 2. The Firm
    • Controlled by Entrepreneur – who decides
    • What to produce?
    • Where to produce?
    • How to produce?
    • How much to produce?
    • Whom to sell?
    • At what price?
  • 3. Risk taking earns profit as rewards
    • The firm organises all factors of production
    • Plant (Place of production)
    • Labour – pays wages for services
    • Own funds – borroed funds (pays interest)
    • Manages the entire operation including
    • Stocking, distribution, selling and
    • recovery of sales proceeds.
  • 4. Firm and Industry
    • Firm is an individual productive unit.
    • Industry is a set of all such firms engaged in identical productive activity.
    • Homogenours products – steel, cement.
    • Same type of products – textile cloth.
    • Common raw materials – clay used for pottery, crockery.
    • Similar processes : engineering, transport.
    • Similar trade and services: banking – public, private, cooperative.
  • 5. Plant
    • A Plant is a Technical Unit to be used in a broad sense to include Farms, Offices, Shops, Stores, Warehouses, Workshops, Factories, etc.
    • A Plant enjoys autonomy within the broad framework laid down by the firm, and tkes decisions on technical aspects.
    • A Plant is a body of persons who work to specified timings and at a given place.
    • A Plant is controlled by a single firm.
    • A Plant produces products having similar technology.
  • 6. Firm
    • A firm can own more than one plant.
    • Has unified control over all plants.
    • The firm organises resources and organizes their efficient use.
    • A firm can be subsidiary of another firm.
    • A firm is a separate legal entity – can sue and be sued, whereas the plant is not.
    • Lon-term motive of the firm is to produce for profits, while in the short-run it may be to maximise sales, corner market, have steady income, business reputation, prestige etc.
  • 7. Industry
    • An industry is a group of firms. There has to be some common factor among all the firms that make up the industry.
    • Supply side : raw material used
    • production technique
    • Demand Side : Similarity among the products produced.
    • All the firms producing substitute products can be grouped under one industry.
  • 8. Economic Concepts
    • 1.Opportunity Cost
    • 2. Equi-marginal principle
    • 3. Incremental principle
    • 4. Time perspective; and
    • 5. Discounting Principle
  • 9. Opportunity Cost
    • When own capital is invested, the interest the entrepreneur would have earned had he invested elsewhere is to be taken into account.
    • Similarly, time and effort devoted in organising the businesss will have to be valued.
    • If the business does not produce adequate profits in the long run compared to the sacrifice made, he will have to take a decision to shut down or reorganize the business for better profits.
  • 10. Equimarginal principle
    • This is very significant in resource allocation.
    • Resources are allocated in such a way that optimum efficiency is reached.
    • This can be done by ensuring that the Value of Marginal Product is the same in all the activities of the firm.
  • 11. Incremental Concept
    • Incremental Revenue should be more than incremental cost.
    • This formula should be applied to alternative decisions.
  • 12. Time Perspective
    • The really important problem in decision making is to maintain the right balance between long-run, short-run and intermediate-run perspectives.
  • 13. Discounting Principle
    • In this principle, the present gain is valued more than future gain.
    • If V = present value, A = annuity or returns expected during a year, I = current rate of interest, applying the formula
    • V = A = 110 = 100
    • (1 + i ) 1+0.1
    • Thus for comparison only Rs.100 is to be taken not 110.
  • 14. The scientific approach of Building an Economic Model
    • 1. Defining the Problem
    • 2. Formulation of Hypothesis
    • 3. Abstraction/Model Building
    • 4. Data Collection
    • 5. Testing the Hypothesis
    • 6. Deduction
    • 7. Evaluating the Test Result
    • 8. Conclusion
  • 15. Defining the problem
    • A. statement of the problem to be solved.
    • B. Define correctly the problem by framing appropriate questions.
    • C. Arrive at the nature, course and direction of the business research to be undertaken.
  • 16. Formulation of Hypothesis
    • Hypothesis is a tentative untested behaviour or assumption about the course of behavioural tendency and to discover the cause and effect relationships.
    • In managerial economics, hypotheses are formed to identify pattern of economic behaviour and discover business variables’
    • relationship in order to test the proposition and arrive at a decision.
  • 17. Abstraction /Model Building
    • Choose and select only relevant information.
    • Assumptions and identificatioins are utilised to simplify and highlight essential features of the events.
    • Based on scientific enquiry, out of many choices only few or even one is chosen.
    • In cause effect relationship, all other factors which are unimportant for our study, are assumed to be constant.
    • The abstract should represent the real world phenomena.
  • 18. Data Collection
    • Relevant data have to be collected as per the model specifications of the variables such as price, demand, sales, advertising expenditure &c.
    • These data may be a) time series data b)Cross sectional data or c) Pooled data.
  • 19. Testing the hypothesis
    • Hypothesis is to be tested with the help of data collected by adopting the following major steps:
    • 1. We first set up a hypothesis or assumption. Formulation of null hypothesis – Ho
    • 2. Specify, alternates, H1, H2.
    • 3. Accept Ho - null hypothesis if it is true based on evidence (supporting data).
    • 4. Reject Ho – if not supported by evidence.
  • 20. Deduction
    • Assuming that the hypothesis is accepted as it, not only, indicates cause effect relationship, but also serves as the basis of predictions.
    • Predictions, forecasts are obtained by deductive reasoning.
    • Example: Increase in ad. Expenditure, resulted in improved sales. It is deduced that the firm can increase expenditure on advertisements.
  • 21. Evaluating the Test Result
    • When real world events confirm a hypothesis, it is accepted. Acceptance is not proving. It needs to be tested, to find out whether the predictions are correct.
    • If observed facts contradict the predictions, the hypothesis is rejected.
    • But if it successfully survives a number of tests, it is accepted as a theory.
  • 22. Conclusion
    • An accepted hypothesis can form the basis for decision making.
    • Interpretation and arriving at inferences from empirical results for taking decision about the future course of action, will call for the skill of the manager.
  • 23.
    • Empirical = Based on observation of facts and experiments and not based on theory.
  • 24. Basic assumptions in Economic Models
    • 1. Ceteris Paribus assumption
    • 2. Psychological assumption about rational behaviour of man.
    • 3. Structural assumptions such as all land is not tillable or production cannot be doubled by doubling the working hours of the worker.
    • 4. Institutional Assumptions:
    • Capitalist economic system – free market economy.
    • Socialistic system – Govt. control on economic resources.
    • Mixed economy – Strategic role of Public sector and relative scope of private sector.
  • 25. Equilibrium in Economic analysis
    • Equilibrium implies absence of change in the behavioural movement.
    • Equilibrium is the best possible stage under existing circumstances, and there is no need for change, so long as circumstances remain the same.
  • 26. Partial Equilibrium
    • Partial equilibrium is based on only restricted range of data – equilibrium price of a single commodity, assuming all other things to be equal.
  • 27. Major advantages of Partial Equilibrium
    • It is simple.
    • It is useful for prediction purposes.
    • It can be applied to solve micro-economic problems.
    • It is a stepping stone to analyse general equilibrium of the economy.
    • It is useful in reviewing market mechanism in a free enterprise economy.
    • It is useful to understand rational human behaviour for maximising satisfaction.
    • It analyses firm’s profit maximisation behaviour.
  • 28. Limitations of Partial equilibrium analysis:
    • 1. It can deal with one economic entity only.
    • 2. It is not applicable for the entire economy.
    • 3. It is based on ceteris paribus.
    • 4. Its unrealistic assumptions, makes it unsuitable for application to world phenomenon.
    • 5. Its analysis is incomplete as only primary and not secondary effects are studied.
    • 6. Its segregation of individual behaviour from the rest of the economy is unrealistic.
  • 29. General Equilibrium
    • An economy is in general equilibrium when all consumers, all firms, all factors of production, all industries, all markets are in equilibrium simultaneously.
    • Two sets of conditions are to be fulfilled to attain general equilibrium:-
    • 1. A subjective condition : Each individual economic entity is attaining its maximisation goals.
    • 2. An Objective condition: Each market (commodity as well as factor) is in equilibrium with demand equal to supply.
  • 30. Usefulness of General Equilibrium analysis:
    • It explains the structure, mechanism and operating forces and working of the entire economic system.
    • It analysses inter-sectoral changes and their impact.
    • It explains the complexities of commodity and factor markets and their inter-relationship.
    • It examines functions of prices and price structure in the economy.
    • It is useful in planning process by providing conceptual basis for input-output analysis.
    • It is useful in public poilicy formulation.
    • It is used in modern welfare economics and monetary theory.
  • 31. Limitations of General Equilibrium analysis.
    • 1. It is essentially static in its approach.
    • 2. It is unrealistic in its assumptions such as perfect competition.
    • 3. It analysis is complicated involving series of simultaneous equations.
    • 4. It ignores leads and lags and considers only instant happenings, which is not realistic.