Managerial-Economics

Presentation on I Module

Managerial Economics

By: Prof. M M Kinagi

Managerial Economics• Branch of Economics.• ‘Managerial Economics is the study of Economic

Theories, Principles and Concepts which is used in Managerial Decision Making.’

• ‘Managerial Economics is the Application of various Theories, Concepts and Principles of Economics in the Business Decisions.’

• It also Includes ‘The Application of Mathematical and Statistical tools in Management decisions.’

Managerial Economics

Economic Theories, Principles

and Concepts.

Managerial Decision Making.

Application

Application

Application of Mathematical And Statistical tools

Managerial EconomicsManagerial Decisions

Choice of productChoice of production method

Choice of price, Etc…

Managerial Economics‘Application of Economic Concepts, Theories and Analytical tools to find

solutions for managerial problems.

Application of Economic concepts,

Theories and Principles in

decision Making

Application of Analytical tools

such as, Mathematical and

Statistical tools

Managerial Economics• Economics.– Theories– Principles– Concepts

• Decision Making.– Selection of best alternative out of various

possible alternatives.

Risk & Uncertainty

EconomicsEconomics: ‘A Queen of Social Sciences’

Economics ‘OIKOS’ ‘NOMOS’ (Greek Words)

‘OIKOS’ ‘HOUSE’ ‘NOMOS’ ‘MANAGEMENT’

According to J.S. Mill Economics is “The practical science of production and distribution of wealth.”‘It is the study of How people produce and spend income.’

EconomicsIt talks about ‘Economic Activity’ and ‘Economic Problem’.

‘It is the Study of Logic choice between Scarce resources and unlimited wants’ ‘Economics is to get the answer to the basic questions of an economy such as, What to produce?, How to produce? And for whom to produce?’ ‘Economics is the social science that is concerned with the production, distribution, and consumption of goods and services.’

EconomicsThere are Two Branches

Micro Economics: Means ‘Small’ or ‘Individual’.The term ‘MICRO’ comes from the Greek word‘MIKROS’ Which means ‘Small’ or ‘Individual’.

Macro Economics: Means ‘Group’ or ‘Whole’.The term ‘MACRO’ comes from the Greek word ‘MAKROS’ Which means ‘Large’ or ‘Whole’.

Micro Economics

• Micro Economics: ‘It is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular industries.”

• Some of the theories which come under Micro Economics,–Theory of Individual/Market Demand.–Theory of Production and Cost.–Theory of Markets and price.–Theory of profit, Etc…

Macro Economics

• Macro Economics: ‘It deals not with individual quantities as such but with aggregates of these quantities, not with individual incomes but with national income.’

• Some of the theories which come under Macro Economics,– Theory of total output and employment.– General price level.– Theory of Inflation.– Theory of trade cycles– Economic growth, Etc…

Difference between Managerial Economics and Economics

Economics1.Comprehensive and wider scope2.It has both Micro and Macro in nature3.It is both Normative and positive science4.It is concerned with the formulation of theories and principles5.It discusses general problems

Managerial Economics1.Narrow and limited scope2.It is essentially Micro in nature and Macro in analysis3.It is mainly a Normative science4.It is concerned with the application of theories and principles of economics5.It discusses Individual problems

Nature of Managerial Economics Science as well as Art of decision making. It is essentially Micro in nature but Macro in

analysis. It is mainly a Normative science but positive in

analysis. It is concerned with the application of theories and

principles of economics. It discusses Individual problems. It is dynamic in nature not a Static. It discuss the economic behavior of a firm. It concentrates on optimum utilization of resources.

Scope of Managerial Economics

Objectives of a Firm.Demand Analysis and Forecasting.Production and cost analysis.Pricing decisions.Profit management.Capital management.Market structure.Inflation and economic conditions.

Managerial economics and Decision Making

• Decision making:– Decision making on internal affairs.– Decision making on external affairs.Internal affairs talk on internal environment which

consists of internal factors such as, Production, Financial, Marketing and Human resource related decisions.

External Affairs talk on external environment which consists of external factors such as, PEST related decisions.

Decision Making

• Uncertainty:– Nothing can be expectable because of the

constant changes in the environment both internally as well as externally.

• Risk: – It is the situation which comes under uncertainty.

Decision???????????????

How to take decision????????????

By using…. Economic Models

Economic Models

Economic model is the structural and scientific method of constructing or developing Solutions by

using basic economic principles, concepts, theories and Quantitative

techniques such as mathematical and statistical tools.

Steps to co

nstruct

Economic Models

Defining the problem

Formulation of hypothesis

Data collection

Analysis of data using Basic Principles of economics and Quantitative

Techniques.

Evaluating results

Testing of Hypothesis

Conclusion for decisions.

Basic Principles of Managerial Economics

Opportunity cost principle.Marginalism principle.Equi-marginalism principle.Incremental principle.Time perspective principle.Discounting principle.

Opportunity Cost Principle

Choice involves sacrifice.The cost involved with the sacrificeIt is the cost of an next best opportunity which

is lost will be called as Opportunity cost. Ex: 100 Rs can be used for purchasing book or

eating in pizza corner or purchasing of stationeries.

Now the cost of purchasing book is also include the cost of ‘Eating pizza.’

Opportunity Cost in Management

A Production possibility curve

C X

C1 Y

XO D D1 B

Marginalism Principle

Marginal cost and

Marginal profit/benefitMarginal cost is the cost which incurred to

produce the next or one more unit.Marginal Revenue is the benefit which gets by

producing one more or next unit.Cost will be less and benefit will be more.

Marginalism Principle

• Marginal cost (MC)= (TC)n - (TC)n-1

• Marginal Revenue(MR)=(TR)n – (TR)n-1

Decision Rule:MR > MC…..MR=MC…..MR<MC

Equi-marginalism Principle

• Allocation of scarce resources on different alternative uses should be equally distributed.

i.e.. MPa = MPb =MPc =MPd Or

MPa = MPb = MPc = MPdCOPa COPb COPc COPd.

Incremental Principle

• Incremental principle gives an idea to increase the production not only with one more product it could be any quantity till the profit exists.

• According to this principle profit can be existed either by increasing sales or total revenue or by decreasing total cost

• Decision Rule, • i.e. TC<TR……TC=TR……TC>TR

Time Perspective Principle

• According to the principle all decisions should be under two formats i.e. short run and long run, Because of the decisions characteristics.

• So each decision should be made in Short run basis as well as long run basis.

• According to short run decision the long run decision will get change.

Discounting Principle

• According to this principle, if a decision affects costs and revenues in long-run, all those costs and revenues must be discounted to present values before valid comparison of alternatives is possible. This is essential because a rupee worth of money at a future date is not worth a rupee today. Money actually has time value.

Discounting Principle

• This could be understood using the formula,

FV = PV*(1+r) t AndPV = FV/ (1+r) t

• Where, FV is the future value, PV is the present value, r is the discount (interest) rate, and t is the time between the future value and present value.

Quantitative Techniques used in Managerial Economics

• Variables• Functions• Schedules• Graphs• Derivatives• Differentiation• Integration etc…