Introduction to managerial economics

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Introduction to managerial economics

  1. 1. MANAGERIAL ECONOMICSBy Snigdha Singh 1
  2. 2. INTRODUCTIONEmergence of managerial economics as a separate course of management studies can be attributed to at least three factorsa) 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. 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 nationEconomics is also a study of choice-making behaviour of the people. 3
  4. 4. Managerial EconomicsManagerial economics can be broadly defined as the study ofeconomic theories, logic and tools of economic analysisthat are used in the process of decision making. Economictheories and techniques of economic analysis are applied toanalyze business problems, evaluate business options andopportunities with a view to arriving at an appropriatebusiness decision. 4
  5. 5. Douglas : Managerial economics is concernedwith the application of economic principles andmethodologies to the decision making processwithin the firm or organization. It seeks toestablish rules and principles to facilitate theattainment of the desired economic goals of themanagement. 5
  6. 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
  7. 7. Nature Arts or science? 7
  8. 8. Scope Demand Analysis Cost Analysis Pricing Practices and Policies Profit Management Capital Management Analysis of Business Environment Allied Disciplines 8
  9. 9. Difference b/w Managerial and TraditionalEconomics Traditional ManagerialIt has Micro & Macro aspects Micro aspectIt is both positive and normative Normative in naturescienceIt deals with theoretical aspect Practical AspectIt studies human Behavior on certain No assumptionsassumptionsWe study Economic aspects of the Both economic and non-economicproblem aspectsStudies principles underlying rent, Only the principles of profitwages, interest and profitsLimited scope Wide scope 9
  10. 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. 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. 12. Micro-economics applied to internal issues :Operational issues are of internal nature. Internal issues includeall those problems which arise within the business organizationand 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. 13. How to decide on new investmentsHow to manage capital and profitHow to manage inventory i.e. stock of bothfinished goods and raw materialMost of the micro economic problems deals withmost of these questions.The Law DemandThe Theory of ProductionAnalysis of Market Structure and PricingTheory 13
  14. 14. Profit analysis and managementIt guide firms in the measurement and managementof profit , in making new allowances for the riskpremium, in calculating the pure return on capitaland pure profit and also for future planning.Theory of Capital and Investment Decisions Knowledge of capital theory can contribute agreat deal in investment-decision making, choice ofprojects, maintaining the capital, capital budjetingetc. 14
  15. 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. 16. Macro-economics deals with external issues :The type of economic system in the countryGeneral trends in N.I., employment, prices, savings andinvestmentsStructural change in the working financial institutionsviz., banks, insurance companies etcMagnitude of and trends in foreign tradeTrends in labour supply and strength of capital marketGovernment’s economic policiesi.e., industrial, monetary, fiscal, price and foreign etc. 16
  17. 17. Social factors viz., value system of thesociety, property rights, customs and habits etc.,Political environmenti.e., democratic, authoritarian, socialist politicalsystems, or state attitude towards private business manetc.These Environmental factors have a far-reachingbearing upon the functioning and performance of thefirms. Therefore, decision makers have to take in toaccount the present and future economic, political and 17
  18. 18. Conditions in the country and give due considerationto the environmental factors in the process of decisionmaking.Eg : SEZ in the Nandigram, Tata’s small car in Singurdistrict in West Bengal 18
  19. 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. 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. 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. 22. Assisting the business planning process of thefirmDiscovering new possible fields of businessendeavor and its cost-benefit analysisAdvising on prices, investment and capitalbudgeting policiesEvaluation of capital budgeting etc. 22
  23. 23. DECISION MAKING AREASBusiness 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. 24. Decision Making Areas Demand Production Study of Pricing and Investmentforecasting planning related decisions economic and cost environment decisions revenue decision 24

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