managerial economics application

1. BY,
MATHEW V JOSEPH
MBA
MARIAN COLLEGE,KUTTIKANAM,
KERALA

2. Managerial economics is a broad sense , can be called applied
economics. Managerial economics is used for the analysis of
business problem and decision making. Decision making is the
basic function of all the human being. The important economic
theories are described below

3.  Theory of demand
 Theory of production
 Cost theory
 Theory of price
 Theory of profit
 Theory of capital

4. Demand is the quantity of a good or service that consumers are willing
and able to buy at a given price in a given time period
Each of us has an individual demand for particular goods and services and our
demand at each price reflects the value that we place on a product, linked
usually to the enjoyment or usefulness that we expect from consuming it.
Economists give this a term - utility.
The Law of Demand
There is an inverse relationship between the price of a good and demand.
 As prices fall, we see an expansion of demand.
 If price rises, there will be a contraction of demand.

6.  A production process can be defined as any activity that
increases the similarity between the pattern of demand for
goods and services, and the quantity, form, shape, size,
length and distribution of these goods and services available
to the market place.
 Production is a process that combines various material inputs
and immaterial inputs (plans, know-how) to make something
for consumption (the output). It is the act of creating output,
a good or service that has value and contributes to
the utility of individuals.

8. Costs are very important in business decision-making. Cost
of production provides the floor to pricing. It helps managers
to take correct decisions, such as what price to quote, whether
to place a particular order for inputs or not whether to
abandon or add a product to the existing product line and so
on.
Ordinarily, costs refer to the money
expenses incurred by a firm in the production process. But in
economics, cost is used in a broader sense. Here, costs include
imputed value of the entrepreneur’s own resources and
services, as well as the salary of the owner-manager.

9. The theory of price, also known as price theory, is
a microeconomics principle that involves the analysis of supply and
demand in determining an appropriate price point for a good or service.
The goal is to achieve equilibrium in which the quantities of goods or
services provided match the corresponding market's desire and ability
to acquire the good or service. This concept allows for price
adjustments as market conditions change.
For example: Suppose that market forces determine that it costs $5
for a widget. This suggests that widget buyers are willing to forgo the
utility in $5 in order to possess the widget and that the
widget seller perceives that $5 is a fair price in exchange for giving up
the widget. This simple theory of determining prices is one of the core
principles underlying economic theory.

11. In Economics, however, the term has a precise meaning. Profit may be
defined as the net income of a business after all the other costs-rent,
wages and interest etc., have been deducted from the total income.
Profits are, therefore, uncertain and vary from person to person and
from firm to firm. They may become zero, when costs are equal to
income, and if the costs are higher, profit may actually be converted into
loss.
Pure profit is the reward of entrepreneurial functions. It is what an
entrepreneur gets purely as an entrepreneur. What he gets as a landlord,
manager or capitalist is deducted from the total profits. Hence,
Pure Profit is an amount which accrues to the entrepreneur for assuming
the risk inseparable from business.

12. Capital is always scares and hence it is expensive at the same time
it is life food of a business. Allocation and management of capital is
the most complex problem faced by the manager. The budgeting of
capital involves planning and controlling of capital expenditure.
Capital budgeting, is the planning process used to determine
whether an organization's long term investments such as new
machinery, replacement of machinery, new plants, new products,
and research development projects are worth the funding of cash
through the firm's capitalization structure (debt, equity or retained
earnings). It is the process of allocating resources for major capital,
or investment, expenditures. One of the primary goals of capital
budgeting investments is to increase the value of the firm to the
shareholders.