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nature scope significance of Managerial Economics


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nature scope significance of Managerial Economics

  1. 1. Nature and Scope and Significance of Managerial Economics
  2. 2. Concept of Economics • Economics is the science of choice in the face of unlimited ends and scarce resources which have alternative uses. Since resources are scarce and the uses to which they can be put to are unlimited, one is required to choose the best amongst the available alternatives. The crux of the problem which economics tries to address is the choice of the best uses of resources among the alternative uses.
  3. 3. Cont.. • Generally, economics can be divided into two broad categories: microeconomics and macroeconomics. • Macroeconomics is the study of the economic system as a whole. It includes techniques for analyzing changes in total output, total employment, the consumer price index, the unemployment rate, and exports and imports. Only aggregate levels of these variables are considered.
  4. 4. • But concealed in the aggregate data are countless changes in the output levels of individual firms, the consumption decisions of individual consumers, and the prices of particular goods and services. These all fall under the domain of microeconomics. • Microeconomics focuses on the behavior of the individual actors on the economic stage, that is, firms and individuals and their interaction in markets. Cont..
  5. 5. Origin of Managerial Economics • Like every other individual a manger of a business firm has to take decisions in the face of scarcity and alternative uses of resources. In fact success of a business firm largely depends upon the efficiency in utilization of limited resources remaining in the disposal of the business firm.
  6. 6. Cont… • Thus managerial economics is evolved as an important tool kits which is useful in the decision making for the manager. • The development of managerial economics as a separate discipline has a recent origin. Joel Dean’s book Managerial Economics published in 1951 is taken as the pioneer in this discipline. • Due to wide recognition of the uses of economic theories in the decision making of the business this subject is rich in literature in these days.
  7. 7. Concept of Managerial Economics • Managerial economics is the discipline that deals with the application of economic concepts, theories and methodologies to the practical problems of businesses/firms in order to formulate rational managerial decisions for solving those problems. • It uses the tools and techniques of Economic analysis to solve managerial problems or to achieve the firm’s desired objective. It is that branch of economics, which serves as a link between abstract theories and managerial practices. It is based on economic analysis for identifying problems, organizing information and evaluating alternatives.
  8. 8. Cont… • Managerial economics borrows theories from traditional economics i.e. microeconomics where as it borrows tools from decision science i.e. mathematics and statistics and it tries to find out optimum solution of business problems. • Thus Spencer and Seligman defined Managerial economics as “The integration of economic theory and business practice for the purpose of facilitating decision-making and forward planning by management.”
  9. 9. Cont… • Following diagram shows how does the managerial economics provide the link between traditional economics and decision sciences Management Problems Economic Theory Decision Sciences Managerial Economics Economic Methodology: Descriptive Model Prescriptive Model Study of Functional Areas: Accounting, Finance, and Marketing Optimal Decision
  10. 10. Distinction between Managerial Economics and Traditional Economics • There are some differences between managerial economics and traditional economic theory because managerial economics seeks the help of other disciplines such as statistics, mathematics, accounting, management to get optimal solution to the managerial decision-making problems.
  11. 11. Cont… • Differences between managerial economics and traditional economics which are outlined below: 1.Managerial economics concerns with the application of economic principles to the problems of the firm but the traditional economics deals with the body of principles itself.
  12. 12. Cont… 2. Managerial economics is highly microeconomics in character. It studies the problems of a firm but does not study the macroeconomic phenomenon. But traditional economics consist of both micro and macro economics.
  13. 13. Features of Managerial Economics Even if there are some differences among scholars on the subject of features of managerial economics, here some of the commonly agreed characteristics of managerial economics are introduced. They are: • Microeconomics character: - Managerial economics is microeconomics in character because its unit of study is firm. However, it always takes the help of macroeconomics to understand and adjust to the environment in which the firm operates.
  14. 14. Cont… • Choice and Allocation: - Managerial economics is concerned with decision-making of economic nature. This implies that managerial economics deals with identification of economic choices and allocation of scarce resources on the best alternative. • Goal Oriented: - Managerial economics is goal-oriented and prescriptive. It deals with how decisions should be formulated by managers to achieve the organizational goals.
  15. 15. Significance - How Is Managerial Economics Useful? • Evaluating Choice Alternatives – Identify ways to efficiently achieve goals. – Specify pricing and production strategies. – Provide production and marketing rules to help maximize net profits. • Making the Best Decision – Managerial economics can be used to efficiently meet management objectives. – Managerial economics can be used to understand logic of company, consumer, and government decisions.