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1. INTRODUCTION TO ME_5_6_920230724131405.ppt
- 1. Economics and Managerial DecisionMaking • Economics is “the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.” • Management is the discipline of organizing and allocating a firm’s scarce resources to achieve its desired objectives. Involves the ability to organize and administer various tasks in pursuit of certain objectives. • How does managerial economics differ from “regular” economics? • There is no difference in the theory; standard economic theory provides the basis for managerial economics. • The difference is in the way the economic theory is applied.
- 2. Definitions of Managerial Economics •Integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. – Prof. Spencer Sigelman. • The purpose of Managerial economics is to show how economic analysis can be used in formulating business policies – Prof. Joel Dean • Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.
- 3. Introduction. The natureof managerial economic decision making The role of managerial economics in managerial decision making Managerial decision problems Product price and output Make or buy Production technique Internet strategy Advertising media and intensity Investment and financing Economic concepts Theory of consumer behaviour Theory of firm Theory of market structures and pricing Decision making tools Numerical analysis Statistical analysis Forecasting Game theory Optimisation Managerial Economics Use of economics concepts and decision making tools to solve managerial decision problems Optimal solutions
- 4. Opportunity Cost • Definition– the cost expressed in terms of the next best alternative sacrificed • Helps us view the true cost of decision making • Implies valuing different choices.
- 5. Production Possibility Frontier •Show the different combinations of goods and services that can be produced with a given amount of resources • No ‘ideal’ point on the curve • Any point inside the curve – suggests resources are not being utilized efficiently • Any point outside the curve – not attainable with the current level of resources • Useful to demonstrate economic growth and opportunity cost
- 6. Production Possibility Frontiers CapitalGoods Consumer Goods Yo Xo A B Y1 X1 Assume a country can produce two types of goods with its resources – capital goods and consumer goods If it devotes all resources to capital goods it could produce a maximum of Ym. If it devotes all its resources to consumer goods it could produce a maximum of Xm Ym Xm If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.
- 7. Production Possibility Frontiers Capital Goods ConsumerGoods Yo Xo A .B C Y1 X1 Production inside the PPF – e.g. point B means the country is not using all its resources It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.
- 8. Positive and NormativeEconomics • Health care can be improved with more tax funding • Pollution control is effective through a system of fines • Society ought to provide homes for all • Any strategy aimed at reducing factory closures in deprived areas would be helpful • Positive Statements: Capable of being verified or refuted by resorting to fact or further investigation • Normative Statements: Contains a value judgement which cannot be verified by resort to investigation or research
- 9. Micro and Macroeconomics •2major branches of economics •Micro – derived for Greek word micros meaning small •Macro – derived form Greek word macros means aggregative – whole – large
- 10. Microeconomics • Branch ofeconomics which is concerned with analysis of behavior of the individual economic units or variables such as an individual consumer or a producer or the price of a particular product. • Basically deals with individual decision making and the problem of resource allocation. • Examines in particular as to how individual consumers and producers behave and how their behaviors interact
- 11. Importance and usesof microeconomics • Explains price determination and allocation of resources • Direct relevance in business decision making • Serves as a guide for business/ production planning • Serves as a basis for prediction • Useful in determination of economic policies of the government • Serves as the basis for welfare economics • Explain the phenomena of international trade
- 12. Macroeconomics • Branch ofeconomics which deals with the aggregate behavior of the economy as a whole • Macroeconomics is essentially aggregate economics • Study of economic system in general • Study of very large, economy – wide aggregate variables like national income, total savings, total consumption, total investment, money supply, unemployment, price levels, economic growth rate etc.
- 13. Importance of macroeconomics •Explains the working of the economy as a whole • Knowledge is indispensable for policy makers • Useful for the planner for preparing economic plans for the country’s development • Helpful in international comparison
- 14. Distinction between microand macroeconomics MICRO- • Study of individual • Individualistic approach • Variables – individual demand, supply, price etc. MACRO - • Study of aggregate • Aggregate approach • Variables – aggregate demand, aggregate supply, price level etc.
- 15. Review of EconomicTerms • Microeconomics is the study of individual consumers and producers in specific markets. Supply and demand Pricing of output Production processes Cost structure Distribution of income and output
- 16. Review of EconomicTerms • Macroeconomics is the study of the aggregate economy. National Income Analysis (GDP) Unemployment Inflation Fiscal and Monetary policy Trade and Financial relationships among nations
- 17. Review of EconomicTerms • Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people. • Resources are factors of production or inputs. • Examples: • Land – All Natural Resources • Labor – All Human Resources • Capital – All Manmade Productive Assets • Entrepreneurship – All Enterprising Skills
- 18. Economics and Managerial DecisionMaking • Relationship to other business disciplines Marketing: Demand, Price Elasticity Finance: Capital Budgeting, Break-Even Analysis, Opportunity Cost, Economic Value Added Management Science: Linear Programming, Regression Analysis, Forecasting Strategy: Types of Competition, Structure- Conduct-Performance Analysis Managerial Accounting: Relevant Cost, Break-Even Analysis, Incremental Cost Analysis, Opportunity Cost
- 19. Economics and Managerial DecisionMaking • Questions that managers must answer: What are the risks involved? • Risk is the chance or possibility that actual future outcomes will differ from those expected today. • Types of risks: • Changes in demand and supply conditions • Technological changes and the effect of competition • Changes in interest rates and inflation rates • Exchange rates for companies engaged in international trade • Political risk for companies with foreign operations
- 20. Nature of Managerial Economics •Managerial economics aims at providing decision making to firms. • It draws heavily on the prepositions of micro economic theory that studies the phenomenon at individual level i.e. behavior of individual consumers, households and firms.
- 21. Nature of Managerial Economics •The concepts of economics which ME frequently uses are : • Elasticity of demand. • Marginal cost. • Marginal revenue. • Market structures and their significance in pricing policies.
- 22. Nature of Managerial Economics •ME makes use of both Micro & Macro economics. • Micro economics assists the firm in forecasting & macro economics studies the aggregate levels. Macro economics indicates the relationship between, for example, level of consumption and national income, level of national income and employment etc.
- 23. Nature of Managerial Economics •This helps the management in knowing the level of demand at a future period of time, based on the relationship between the national income and the demand for a particular product. • Eg : Demand for cars, televisions, refrigerators etc can have a impact of changes in the level of national income.
- 24. Nature of Managerial Economics •ME is prescriptive in nature. It recommends how a thing should be done in alternative conditions. • Eg: It may be derived from economic analysis that it is more profitable to produce 100 units of a particular product by using 5 machines and 15 workers than using 2 machines and 25 workers.
- 25. Nature of Managerial Economics •ME uses a scientific approach. In practice some firms may use simple rules based on past experience. • However, the quality of decisions made can be improved by using a systematic approach. • This is achieved by the study of ME.
- 26. Scope of ME •The scope of ME is so wide that it touches almost all areas of the manager’s decision making. • It deals with demand analysis, forecasting, production function, cost analysis, inventory management, resource allocation, capital budgeting. • A brief introduction to these areas will give an idea of the scope of ME.
- 27. Scope of ME •Demand Analysis and forecasting : • A correct analysis of the future demand for a companies product enables a manager to take decisions related to the production scheduling & inventory management. • For this he has to consider things such as income elasticity and cross elasticity. • This process of accessing the future demand is called as demand forecasting.
- 28. Scope of ME •Production function : • We know that resources are scarce and have alternative uses. Inputs play a imp. role in the economics of production. • The factors of production should be combined in a particular way to maximize output. • Alternatively, when the prices of some inputs shoots up, a manager has to work out a change in the use of inputs so as to bring the total costs of production as low as possible. • Thus, production function helps ME.
- 29. Scope of ME •Cost analysis : • Cost analysis talks of determinants of costs, relationship between costs and output, forecast of cost and profit etc. which is essential for managerial decision making. • Inventory management : • Large capital of companies is blocked in inventory. If this capital can be saved, it can be used for alternative production priorities. • Tools like ABC analysis etc. help the managers in deciding the levels of inventory.
- 30. Scope of ME •Pricing : • The price of the product often determines how much of what product will be purchased. • Merely knowing the cost of production is not enough to set the price. Various other aspects such as the market conditions, conditions of competition, various options available for pricing also have to be considered.