Introduction to Managerial Economics-Yuvaraja SE


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Introduction to Managerial Economics-Yuvaraja SE

  1. 1. Managerial Economics <ul><li>Branch of Economics . </li></ul><ul><li>‘ Managerial Economics is the study of Economic Theories, Principles and Concepts which is used in Managerial Decision Making. ’ </li></ul><ul><li>‘ Managerial Economics is the Application of various Theories, Concepts and Principles of Economics in the Business Decisions. ’ </li></ul><ul><li>It also Includes ‘The Application of Mathematical and Statistical tools in Management decisions.’ </li></ul>
  2. 2. Managerial Economics Economic Theories, Principles and Concepts. Managerial Decision Making. Application Application Application of Mathematical And Statistical tools
  3. 3. 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
  4. 4. Managerial Economics <ul><li>Economics. </li></ul><ul><ul><li>Theories </li></ul></ul><ul><ul><li>Principles </li></ul></ul><ul><ul><li>Concepts </li></ul></ul><ul><li>Decision Making. </li></ul><ul><ul><li>Selection of best alternative out of various possible alternatives. </li></ul></ul><ul><ul><li>Risk & Uncertainty </li></ul></ul>
  5. 5. Economics <ul><li>Economics: ‘A Queen of Social Sciences ’ </li></ul><ul><li>Economics ‘OIKOS’ ‘NOMOS’ (Greek Words) </li></ul><ul><li> ‘ OIKOS’ ‘HOUSE’ </li></ul><ul><li> ‘ NOMOS’ ‘MANAGEMENT’ </li></ul><ul><li>According to J.S. Mill Economics is “The practical science of production and distribution of wealth.” </li></ul><ul><li>‘ It is the study of How people produce and spend income .’ </li></ul>
  6. 6. Economics <ul><li>It talks about ‘Economic Activity’ and ‘Economic Problem’. </li></ul><ul><li>‘ It is the Study of Logic choice between Scarce resources and unlimited wants’ </li></ul><ul><li>‘ 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?’ </li></ul><ul><li>‘ Economics is the social science that is concerned with the production, distribution, and consumption of goods and services.’ </li></ul>
  7. 7. Economics <ul><li>There are Two Branches </li></ul><ul><li>Micro Economics: Means ‘Small’ or ‘Individual’ . </li></ul><ul><li>The term ‘MICRO’ comes from the Greek word </li></ul><ul><li>‘ MIKROS’ Which means ‘Small’ or ‘Individual’. </li></ul><ul><li>Macro Economics: Means ‘Group’ or ‘Whole’. </li></ul><ul><li>The term ‘MACRO’ comes from the Greek word ‘MAKROS’ Which means ‘Large’ or ‘Whole’. </li></ul>
  8. 8. Micro Economics <ul><li>Micro Economics: ‘It is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular industries.” </li></ul><ul><li>Some of the theories which come under Micro Economics, </li></ul><ul><ul><li>Theory of Individual/Market Demand. </li></ul></ul><ul><ul><li>Theory of Production and Cost. </li></ul></ul><ul><ul><li>Theory of Markets and price. </li></ul></ul><ul><ul><li>Theory of profit, Etc… </li></ul></ul>
  9. 9. Macro Economics <ul><li>Macro Economics : ‘It deals not with individual quantities as such but with aggregates of these quantities, not with individual incomes but with national income.’ </li></ul><ul><li>Some of the theories which come under Macro Economics, </li></ul><ul><ul><li>Theory of total output and employment. </li></ul></ul><ul><ul><li>General price level. </li></ul></ul><ul><ul><li>Theory of Inflation. </li></ul></ul><ul><ul><li>Theory of trade cycles </li></ul></ul><ul><ul><li>Economic growth, Etc… </li></ul></ul>
  10. 10. Difference between Managerial Economics and Economics <ul><li>Economics </li></ul><ul><li>Comprehensive and wider scope </li></ul><ul><li>It has both Micro and Macro in nature </li></ul><ul><li>It is both Normative and positive science </li></ul><ul><li>It is concerned with the formulation of theories and principles </li></ul><ul><li>It discusses general problems </li></ul><ul><li>Managerial Economics </li></ul><ul><li>Narrow and limited scope </li></ul><ul><li>It is essentially Micro in nature and Macro in analysis </li></ul><ul><li>It is mainly a Normative science </li></ul><ul><li>It is concerned with the application of theories and principles of economics </li></ul><ul><li>It discusses Individual problems </li></ul>
  11. 11. Nature of Managerial Economics <ul><li>Science as well as Art of decision making. </li></ul><ul><li>It is essentially Micro in nature but Macro in analysis. </li></ul><ul><li>It is mainly a Normative science but positive in analysis. </li></ul><ul><li>It is concerned with the application of theories and principles of economics. </li></ul><ul><li>It discusses Individual problems. </li></ul><ul><li>It is dynamic in nature not a Static. </li></ul><ul><li>It discuss the economic behavior of a firm. </li></ul><ul><li>It concentrates on optimum utilization of resources. </li></ul>
  12. 12. Scope of Managerial Economics <ul><li>Objectives of a Firm. </li></ul><ul><li>Demand Analysis and Forecasting. </li></ul><ul><li>Production and cost analysis. </li></ul><ul><li>Pricing decisions. </li></ul><ul><li>Profit management. </li></ul><ul><li>Capital management. </li></ul><ul><li>Market structure. </li></ul><ul><li>Inflation and economic conditions. </li></ul>
  13. 13. Managerial economics and Decision Making <ul><li>Decision making: </li></ul><ul><ul><li>Decision making on internal affairs . </li></ul></ul><ul><ul><li>Decision making on external affairs . </li></ul></ul><ul><ul><li>Internal affairs talk on internal environment which consists of internal factors such as, Production, Financial, Marketing and Human resource related decisions. </li></ul></ul><ul><ul><li>External Affairs talk on external environment which consists of external factors such as, PEST related decisions. </li></ul></ul>
  14. 14. Decision Making <ul><li>Uncertainty : </li></ul><ul><ul><li>Nothing can be expectable because of the constant changes in the environment both internally as well as externally. </li></ul></ul><ul><li>Risk : </li></ul><ul><ul><li>It is the situation which comes under uncertainty. </li></ul></ul>
  15. 15. Decision??????????????? <ul><li>How to take decision???????????? </li></ul><ul><li>By using…. </li></ul><ul><li>Economic Models </li></ul>
  16. 16. Economic Models <ul><li>Economic model </li></ul><ul><li>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 . </li></ul>
  17. 17. Steps to construct Economic Models <ul><ul><li>Defining the problem </li></ul></ul><ul><ul><li>Formulation of hypothesis </li></ul></ul><ul><ul><li>Data collection </li></ul></ul><ul><ul><li>Analysis of data using Basic Principles of economics and Quantitative Techniques . </li></ul></ul><ul><ul><li>Evaluating results </li></ul></ul><ul><ul><li>Testing of Hypothesis </li></ul></ul><ul><ul><li>Conclusion for decisions . </li></ul></ul>
  18. 18. Basic Principles of Managerial Economics <ul><li>Opportunity cost principle. </li></ul><ul><li>Marginalism principle. </li></ul><ul><li>Equi-marginalism principle. </li></ul><ul><li>Incremental principle. </li></ul><ul><li>Time perspective principle. </li></ul><ul><li>Discounting principle. </li></ul>
  19. 19. Opportunity Cost Principle <ul><li>Choice involves sacrifice. </li></ul><ul><li>The cost involved with the sacrifice </li></ul><ul><li>It is the cost of an next best opportunity which is lost will be called as Opportunity cost. </li></ul><ul><li>Ex: 100 Rs can be used for purchasing book or eating in pizza corner or purchasing of stationeries. </li></ul><ul><li>Now the cost of purchasing book is also include the cost of ‘Eating pizza.’ </li></ul>
  20. 20. Opportunity Cost in Management <ul><li>A Production possibility curve </li></ul><ul><li>C X C1 Y </li></ul><ul><li> X </li></ul><ul><li>O D D1 B </li></ul>
  21. 21. Marginalism Principle <ul><li>Marginal cost </li></ul><ul><li>and </li></ul><ul><li>Marginal profit/benefit </li></ul><ul><li>Marginal cost is the cost which incurred to produce the next or one more unit. </li></ul><ul><li>Marginal Revenue is the benefit which gets by producing one more or next unit. </li></ul><ul><li>Cost will be less and benefit will be more. </li></ul>
  22. 22. Marginalism Principle <ul><li>Marginal cost (MC)= (TC) n - (TC) n- 1 </li></ul><ul><li>Marginal Revenue(MR)=(TR) n – (TR) n-1 </li></ul><ul><li>Decision Rule : </li></ul><ul><li>MR > MC…..MR=MC…..MR<MC </li></ul>
  23. 23. Equi-marginalism Principle <ul><li>Allocation of scarce resources on different alternative uses should be equally distributed. </li></ul><ul><li>i.e.. MPa = MP b = MPc =MPd </li></ul><ul><li>Or </li></ul><ul><li> MPa = MP b = MPc = MPd </li></ul><ul><li>COPa COPb COPc COPd. </li></ul>
  24. 24. Incremental Principle <ul><li>Incremental principle gives an idea to increase the production not only with one more product it could be any quantity till the profit exists. </li></ul><ul><li>According to this principle profit can be existed either by increasing sales or total revenue or by decreasing total cost </li></ul><ul><li>Decision Rule,   </li></ul><ul><li>i.e. TC<TR…… TC=TR …… TC>TR </li></ul>
  25. 25. Time Perspective Principle <ul><li>According to the principle all decisions should be under two formats i.e. short run and long run, Because of the decisions characteristics. </li></ul><ul><li>So each decision should be made in Short run basis as well as long run basis. </li></ul><ul><li>According to short run decision the long run decision will get change. </li></ul>
  26. 26. Discounting Principle <ul><li>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. </li></ul>
  27. 27. Discounting Principle <ul><li>This could be understood using the formula, </li></ul><ul><li>FV = PV*(1+r) t And </li></ul><ul><li>PV = FV/ (1+r) t </li></ul><ul><li>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. </li></ul>
  28. 28. Quantitative Techniques used in Managerial Economics <ul><li>Variables </li></ul><ul><li>Functions </li></ul><ul><li>Schedules </li></ul><ul><li>Graphs </li></ul><ul><li>Derivatives </li></ul><ul><li>Differentiation </li></ul><ul><li>Integration etc… </li></ul>