managerial economics introduction

1. Managerial
Economics

2. It’s a study of how people- Individual, households, firms,
nation – maximize their gains from their limited resources
and opportunities
It the study of how men and society choose, with or without
the use of money, to employ scarce productive resources which
could have alternative uses, to produce various commodities
over time and distribute them for consumption now and in
the future amongst various people and groups of `society
Economics

3. … made simpler
…Social Science
…studies Human behavior in relation to optimizing
allocation of available resources to achieve given
ends.
…science which deals with wealth.
…study of the choice-making behavior of the people.
…science of scarcity and choice.
Adam Smith
Father of Modern Economics

4. Hence…
Limited Means
Problem of Choices
Unlimited Desires

5. Why do managers
need to know
Economics?

6. Role of a Manager
To meet Business Objectives
of the Firm
Needs to take
Judicious Decisions
Economics facilitates
‘Decisions’

7. What kind of decisions?
• To be or not to be
• Ensuring revenue
• Production planning
• Maintaining profitability
• Pricing
• Resource allocation
• Etc..
Decisions…
What kind of Environment?
• Complex
• Continuously evolving
• Uncertain & risky
• Incomplete knowledge

8. So a manager needs…
Intelligence
Experience
Intuition
Qualitative Analysis of
Business data
Economic Law &
Economic Theories
Knowledge of
Business Environment

9. Four Stages of Change
Stage 1 Stage 2
Stage 2 Stage 4
Stage 4
Stage 3
Stage 3
Cost
Plus
Cost
Managemen
t
Revenue
Manageme
nt
Revenue
Plus
Changing Economics
•Competition
•Technology
•Customers

10. GAP
Economic
Theory
Business
Environment
Managerial Economics
bridges
the Gap

11. Managerial Economics Fills
The GAP
• Economic Theories
– Cannot be applied directly Business
decision making.
– They do not offer a readymade solution to
business problems.
Economic Theories:
PROVIDE A FRAMEWORK FOR LOGICAL
ECONOMIC THINKING AND ANALYSIS

12. Managerial Economics
It is the integration of economic theory with
business practice for the purpose of
facilitating decision making and forward
planning by management.

13. Scope of
Managerial
Economics

14. Business Decision and
Economic Analysis
Objective to be achieved
Collection and analysis
Developing and analyzing
possible course of action
Selecting the course of action
Determining and Evaluating the
alternative means to achieve Goals

15. Responsibilities of a
Managerial Economist
– Profit Maximization
– To make successful forecast
– Minimising the risk involved in uncertainties
– Reassurance to the management about the
trends
– Establish and maintain contacts with data sources
– Successful decision making and forward planning

16. Launching a New Product
New Product
Operational /
Internal Issues
Environment /
External Issues

17. Operational Issues
• Choice of Business
• What to produce
• Size of the Firm
• Techniques of Production (Factor Combination)
• Price structure of Inputs
• Cost of Production
• Supply position of Inputs (Raw Material)
• How to promote Sales
• Cost structure of Competitive Products
• How to manage profit and Capital
• How to manage Inventory
……………….Microeconomics

18. Environment / External
Issues
• The type of economic system
• The general trend in production, employment,
income, prices ..
• Structure and trends of Financial Institutions
• Trends in Foreign Trade
• Trend in labour and capital market
• Government economic policies
• Social Organization and Social environment
• Political environment
• Influence of MNC’S on Domestic Markets
………………………Macroeconomics

19. Microeconomics applied to
Operational Issues
• It studies the working of markets for particular goods &
services, and the interdependencies among them..
• It includes all those problems which fall within the
purview and control of the management.
• Theory of Demand
• Theory of Production
• Market Structure and Pricing Theory
• Profit Analysis and Profit Management
• Theory of Capital and Investment decisions

20. Macroeconomics applied to
Business Environment
• Macroeconomics is the study of the entire Economy in
terms of the
• Theory of National Income
• Economic Growth
• International Trade
• Demand and Supply of Money
• Monetary and Fiscal Policy
• Inflation and the general behaviour of Prices.
• Globalisation

21. The Three Basic Economic
Questions ????
From the standpoint of a
Country
From the standpoint of a Company
1. What goods and services
should be produced.
2. How should these goods
and services be produced.
3. For whom should these
goods and services be
produced.
1. The Product decision
2. The hiring, staffing, procurement
and capital budgeting decisions.
3. The market segmentation
Macroeconomics Microeconomics

22. Chakravyuh

23. Central Problem of an
Economy
• What to produce
• How to produce
• For whom to produce
• What provision (if any) be made for Economic
Growth

24. What provision should be
made for Economic
Growth?
• Individual and society would not like to use all its
resources for current consumption.
• Resources should be used for producing Capital goods
for increasing the standard of living.
• Capital accumulation and Technological progress
needs to be achieved by sacrificing current
consumptions.

25. Production Possibility
Curve
• Resources of all kinds are scarce.
• We do not have enough resources to produce all of the
goods and services.
• It means, we need to "allocate" resources.
• So that the resources are used for the rewarding kinds of
production --that is, we would like to allocate resources
"efficiently."

26. Choice and Opportunity
Cost
It’s a trade-off.
Whenever we increase the output of one we must
decrease the output of other.
The “Opportunity Cost“ of anything is the value of the
next best alternative that is given up for it.
Cost of any good or service as the value of all the other
goods or services that we must give up in order to
produce it.

27. Production Possibility Curve
At any given time, a country cannot produce more Machines
without producing less of Food.
This relationship is called the “Production Possibility
Frontier."
R
S

28. Economic Growth
Food
Machinery
P
P P
’
P’

29. Capital Formation and
Economic Growth
• Rate of Economic Growth
• Capital Accumulation
• Technological Progress
Consumer Goods
K1
K2
O
C2 C1
Capital Goods Growth Rate