Managerial economics -_i

Managerial Economics - IF.Y.B.M.S. – SEM II

Sucheta Pawar

WHAT IS MANAGERIAL ECONOMICS?

The application of

economic analysis

to evaluate

Business decisions

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WHAT IS ECONOMICS?

Redefined the scope of economics to be "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses" (Robbins, 1932).

In his Essay on the Nature and Significance of Economic Science

Lionel Charles Robbins, Baron Robbins, (22 November 1898 - 15 May 1984) a British economist

Economics deals with Economic Problem concerned with unlimited wants and scarce resourcesEconomics gives choice and economizing as a solution to economic problem

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A business firm also faces Economic Problem

WHAT TO PRODUCE?

HOW TO PRODUCE ?

HOW MUCH TO PRODUCE ?

WHERE TO PRODUCE ?

FOR WHOM TO PRODUCE ?

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APPLICATION OF MANAGERIAL ECONOMICSDominic Salvatore

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PROCESS OF DECISION MAKING

ESTABLISH OBJECTIVE

DEFINE THE PROBLEM

IDENTIFY POSSIBLE SOLUTION

SELECT THE BEST POSSIBLE SOLUTION

IMPLEMENT THE DECISION

CONSIDER INPUT

CONSTRAINTS

CONSIDER LEGAL & OTHER

CONSTRAINTS

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MODEL BUILDINGDEFINITION & ASSUMPTIONS

THEORETICAL ANALYSIS

PREDICTIONS

PREDICTIONS TESTED AGAINST DATA

ACCEPT THE MODEL REJECT THE MODEL

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BRANCHES OF ECONOMICSMICROECONOMICS MACROECONOMICS

Alfred MarshalSlicing/individualistic approach

Law of Demand, value theories,Distribution theories

J.M Keynes.Lumping/ aggregate approach

Effective Demand, National Income,Aggregate Demand

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MICROECONOMICSMERITS DEMERITS

1) Formulates eco policies to promote welfare of masses2) Explains conditions of efficiency & causes of inefficiency & suggests measures3) Explains function of free market economy & explain how fully centralised

economy will fail4) Give importance to perfect competition & explain problems of monopoly.5) Existance of externalities& suggest govt. intervention6) Regressive effect of indirect tax7) Effect of devaluation & exchange rate determination.

1) Assumes full employment in free market economy but fails to explain involuntary unemployment & underutilisation in depression

2) Cant explain trade cycles.3) Apply knowledge of indus. To economy. Wage cut in depression to

increase emp.which is not feasible

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ROLE OF MANAGERIAL ECONOMIST

Study Business Environment

Study Business Operations

Organization of Economic Intelligence

Creation of Public Awareness

According to KJW Alexandra & Alexandra G.KempSales Forecasting, Industrial Market Research,Economic Analysis of Competitors, Pricing problem of the firm & industry, Capital Projects, Production Programme, Security & Investment analysis & forecasts,Advice on trade & public relations, etc

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OBJECTIVES OF FIRMOBJECTIVES OF FIRMS

Profit Maximization

Sales Maximization

Utility Maximization

Staff Maximization

Growth Maximization

Satisfying Behavior

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PROFIT MAXIMIZATION

Walras, Jevons and Marshall

Profit = TR - TC

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SALES MAXIMIZATIONProf. Baumol

Y

IC IC1P

p’

0 Q Q1 x SALES

PROFIT

Leisure activity

UTILITY MAXIMISATIONa) Entrepreneur owner (Prof. Higgins)b) Corporate Firm (Williamson)

STAFF MAXIMIZATIONBerle & Means

Subordinate staff

GROWH MAXIMIZATIONProf. Robin Marris

SATISFYING BEHAVIOURProf. Simon

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CONSTRAINTS OF FIRMS

Resource Constraint

Legal Constraint

Moral Constraint

Contractual Constraint

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DEMANDDESIRE + ABILITY + WILLINGNESS = DEMAND

DIRECT, DERIVED, EX-ANTE, EX-POST, JOINT, COMPOSITE, DEMAND FORPRODUCER’S GOODS & CONSUMER’S GOODS, DURABLE GOODS, PERISHABLE GOODS, AUTONOMOUS DEMAND,INDUSTRY’S DEMAND, COMPANY’S DEMAND

INDIVIDUAL DEMAND AND MARKET DEMAND

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DETERMINANTS OF INDIVIDUAL DEMANDPRICE Px

INCOME Y

PRICES OF RELATED GOODS Pxy

TASTE T

DEMONSTRATION EFFECT D

FUTURE EXPECTATIONS E

ADVERTISEMENT A

UTILITY U

QUALITY Q

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DETERMINANTS OF MARKET DEMAND

POPULATION Pp

COMPOSITION OF POPULATION Cp

ADVERTISING

SOCIAL PRACTICES Sp

CUSTOMS CU

Dx = f ( Px ,Y ,Pxy ,T ,D ,E ,U ,Q ,A ,Pp ,Cp ,Sp ,CU ,………..)

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THE LAW OF DEMAND

STATEMENT Dx = - f (Px)

DEMAND SCHEDULE

DEMAND CURVE

ASSUMPTIONS

EXCEPTIONS : GIFFEN GOODS, SNOB VALUE, EMERGENCIES, FASHION

VARIATION AND CHANGES IN DEMAND

DUE TO PRICE DUE TO OTHER FACTORS