Basic principles in the application of managerial economicsMilan Verma
Basic Principles in the Application of Managerial Economics, what is economics and introduction, Micro economics
Normative (prescriptive) science, Pragmatic (Practical), Uses Macro economics, Uses theory of firm, Management oriented, Multi disciplinary, Art and science. Scope of Managerial Economics, theory of demand and demand analysis, envirmental issues, Significance of managerial economics in decision making, Significance of managerial economics in decision making
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UNIT - I: INTRODUCTION TO BUSINESS ECONOMICS: Definition - Nature and Scope -
The Role of economists in an organization; BASIC ECONOMIC PRINCIPLES: The concept
of Opportunity Cost - Discounting principle - Time perspective - Incremental Concept –
Equi-Marginalism; OBJECTIVES OF THE FIRM: Profit Maximization - Sales Maximization
and other objectives.
in this topic we are going to learn managerial economics where we explore how businesses make informed decisions in a constantly changing economic landscape
Basic Concepts of Economics: Introduction to Economics , Basic Economic Problem, Circular Flow of
Economic Activity , Adam Smith and Invisible Hand. Nature of the firm - rationale, objective of maximizing
firm value as present value of all future profits, maximizing, satisficing, optimizing, principal agent problem,
Accounting Profit and Economic Profit , Role of profit in Market System
Demand Analysis and Forecasting: Determinants of Market Demand at Firm and Industry level –
Elasticity of Demand - Market Demand Equation – Use of Multiple Regression for estimating demand –
Case study on estimating industry demand (formulating equation and solving with the aid of software
expected)
Demand and Supply: Market Equilibrium – Pricing under perfect competition, monopolistic competition,
Case study on pricing under monopolistic competition , Oligopoly - product differentiation and price
discrimination; price- output decision in multi-plant and multi-product firms.
Cost Concepts: Cost Concept, Opportunity Cost, Marginal, Incremental and Sunk Costs, Cost Volume Profit
Analysis, Breakeven Point, Case Study on marginal costs. Risk Analysis and Decision Making: Concept of
risk, Expected value computation, Risk management through Insurance, diversification, Hedging, Decision
Tree Analysis, Case Study on Decision tree Technique.
Money and Capital Markets in India: Role and Functions of Money Markets, Composition of Money
Market, Money Market Instruments , Reserve Bank of India – Functions , Regulatory Role of RBI w.r.t.
Currency, Credit and Balance of Payment, Open Market Operations. Role and Functions of Capital Markets,
Composition of Capital market, Stock Exchanges in India, Role of SEBI, understanding of stock market
quotations in financial press expected.
Public Finance Infrastructure: Familiarity with important terms/agencies/approaches/practices related to
National Income (such as GDP, PPP, Growth Rate), Foreign Trade (such as GATT, WTO) Union budget
(such as Revenue Account, Capital Account, Revenue Deficit, Fiscal Deficit, Plan and Non-plan expenditure)
is expected. Understanding of Summarize
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2. INTRODUCTION
Emergence of managerial economics as a separate course of
management studies can be attributed to at least three factors
a) Growing complexity of business decision making process due to
changing market conditions and business environment.
b) The increasing use of economic logic, conceptual theories and
tools of economic analysis in the process of business decision
making process.
c) Rapid increase in demand for professionally trained managerial
manpower.
2
3. Defining Economics
Economics is a social science, which studies
human behaviour in relation to optimizing
allocation of available resources to achieve the
given goals.
Eg : individual household behaviour, firm, industry and
nation
Economics is also a study of choice-making behaviour
of the people.
3
4. Managerial Economics
Managerial economics can be broadly defined as the study of
economic theories, logic and tools of economic analysis
that are used in the process of decision making. Economic
theories and techniques of economic analysis are applied to
analyze business problems, evaluate business options and
opportunities with a view to arriving at an appropriate
business decision.
4
5. Douglas : Managerial economics is concerned
with the application of economic principles and
methodologies to the decision making process
within the firm or organization. It seeks to
establish rules and principles to facilitate the
attainment of the desired economic goals of the
management.
5
6. Characteristics
Micro Economics
Economics of Firms
Uses Macro-economics Analysis
Managerial Economics is Pragmatic
Managerial Economics is Normative
Bridge between traditional economics and
Business Management
6
8. Scope
Demand Analysis
Cost Analysis
Pricing Practices and Policies
Profit Management
Capital Management
Analysis of Business Environment
Allied Disciplines
8
9. Difference b/w Managerial and Traditional
Economics
Traditional Managerial
It has Micro & Macro aspects Micro aspect
It is both positive and normative Normative in nature
science
It deals with theoretical aspect Practical Aspect
It studies human Behavior on certain No assumptions
assumptions
We study Economic aspects of the Both economic and non-economic
problem aspects
Studies principles underlying rent, Only the principles of profit
wages, interest and profits
Limited scope Wide scope
9
10. Importance
Basis of Business Policies
Predicting economic Quantities
Estimating economics relationship
Helpful in Understanding the External forces
constituting the environment.
Reconciling theoretical concepts of economics
in relation to the actual business behavior and
conditions.
10
11. MICRO ECONOMICS
The branch of economics that analyzes the
market behavior of individual consumers and
firms in an attempt to understand the decision-
making process of firms and households.
the analysis of the decisions made by
individuals and groups, the factors that affect
those decisions, and how those decisions effect
others
11
12. Micro-economics applied to internal issues :
Operational issues are of internal nature. Internal issues include
all those problems which arise within the business organization
and fall within purview and control of the management .
Some of the basic internal issues are :
What to produce
How much to produce
Choice of technology i.e. choosing of the factor –combination
Choice of price i.e. how to price the commodity
How to promote sales
How to face the price competition
12
13. How to decide on new investments
How to manage capital and profit
How to manage inventory i.e. stock of both
finished goods and raw material
Most of the micro economic problems deals with
most of these questions.
The Law Demand
The Theory of Production
Analysis of Market Structure and Pricing
Theory 13
14. Profit analysis and management
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.
Theory of Capital and Investment Decisions
Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
etc. 14
15. MACRO ECONOMICS
Study of the entire economy in terms of the
total amount of goods and services produced,
total income earned, level of employment of
productive resources, and general behaviour of
prices.
Macroeconomics examines economy-wide
phenomena such as changes in unemployment,
national income, rate of growth, gross domestic
product, inflation and price levels.
15
16. Macro-economics deals with external issues :
The type of economic system in the country
General trends in N.I., employment, prices, savings and
investments
Structural change in the working financial institutions
viz., banks, insurance companies etc
Magnitude of and trends in foreign trade
Trends in labour supply and strength of capital market
Government’s economic policies
i.e., industrial, monetary, fiscal, price and foreign etc.
16
17. Social factors viz., value system of the
society, property rights, customs and habits etc.,
Political environment
i.e., democratic, authoritarian, socialist political
systems, or state attitude towards private business man
etc.
These Environmental factors have a far-reaching
bearing upon the functioning and performance of the
firms. Therefore, decision makers have to take in to
account the present and future economic, political and
17
18. Conditions in the country and give due consideration
to the environmental factors in the process of decision
making.
Eg : SEZ in the Nandigram, Tata’s small car in Singur
district in West Bengal
18
19. Responsibilities of Managerial Economist
To make reasonable profits on capital
employed.
Successful forecasts
Knowledge of sources of Economic Information
His status in the firm
19
20. Fundamental Concepts
Opportunity cost
Incremental Principle
Incremental Cost
Incremental Revenue
Business implication of Incremental Concept
Time Perspective
Series of order
Discrimination
Discounting Principle
The Equi-marginal Principle
20
21. Role of a managerial economist in the firm
Demand estimation and forecasting
Preparation of business /sales forecasts
Analysis of market survey to determine the
nature and extent of competition
Analyzing the issues and problems of
concerned industry
21
22. Assisting the business planning process of the
firm
Discovering new possible fields of business
endeavor and its cost-benefit analysis
Advising on prices, investment and capital
budgeting policies
Evaluation of capital budgeting etc.
22
23. DECISION MAKING AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.
“Decision making and processing information are two
important tasks of managers”
In order to make good decisions managers must be able
to obtain, process and use information.
23
24. Decision
Making
Areas
Demand Production Study of Pricing and Investment
forecasting planning related decisions
economic
and cost environment decisions
revenue
decision
24