Nature, Scope and Significance of Maangerial Economics.pptx

Nature

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Signifi

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Maanger

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Dr Mon

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Management

Modern business world –is characterized by dynamism ,computerization,

Economies are no longer self-sufficient, inward-looking; added is the pressure of severe competition due to globalization.

Darwin’s principle applies even today nay more strongly.

Big corporates follow military strategies involving surprise, security and unity of command.

Business units aim at a variety of goals / objectives. Problem of economizing and choice are most

important for firms.

Decision-making is a must at every stage. Survival amidst uncertainties is no doubt

challenging. Managerial Economics helps them to plan and implement decisions in such a complex and dynamic atmosphere.

Business Economics or Economics of firms –provides managers with different tools. techniques and principles enabling them make optimum use of resources within constraints.

Introduction to Managerial Economics

What is “Economics”?

What is ‘ Micro and Macro economics?

What is Managerial Economics?

Nature, scope and significance of Managerial Economics

How it is useful to a Manager?

Functions of a Managerial Economist?

What Role a managerial Economist plays in the Management

Team

Def:- Economics is the ‘Study of allocation of scarce resources, among alternative uses’.

1. Resources are always scarce.2. They are not only scarce, but also have alternative uses.3. Optimum allocation is required

Allocation problems are faced by individuals, Organizations (Both profit making and non- profit making) and Nations also.

Economics deals with:1. How an individual consumer allocates his scarce resources among alternative uses? - in such a way that he always tries to get maximum satisfaction. - Maximization of satisfaction / utility is the goal of an individual consumer.

2. Similarly, an individual producer aims at least cost combination of inputs to get a given quantities of output.

Introduction to Managerial Economics

Introduction to Managerial Economics

3. How an individual firm/Industry attains equilibrium.

A firm is said to be an equilibrium, if it attain profit maximizing level of out put.

It tries to maximize Revenue, or minimize Cost

4. How a country reach equilibrium:

“ Allocating limited resources in such a way that the desired goals are reached”. – The goal may be over all welfare of its people.

Individuals / organizations (profit/non profit)/nations attain their goals, by optimum use of limited resources.

Introduction to Managerial Economics

BUSINESS ADMINISTRATION

DECISION PROBLEMS

MANAGERIAL ECONOMICS : INTEGRATION OF ECONOMIC THEORY AND METHODOLOGY WITH TOOLS AND TECHNICS BORROWED FROM OTHER DECIPLINES

OPTIMAL SOLUTIONS TO BUSINESS PROBLEMS

TRADITIONAL ECONOMICS : THEORY AND METHODOLOGY

DECISION SCIENCES : TOOLS AND TECHNICS

Introduction to Managerial Economics

What is Managerial Economics?

“Managerial Economics is economics applied in decision making. It is a special branch of economics bridging the gap between abstract theory and managerial practice” – Willian Warren Haynes, V.L. Mote, Samuel Paul

“Integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning” - Milton H. Spencer

“Managerial economics is the study of the allocation of scarce resources available to a firm or other unit of management among the activities of that unit” - Willian Warren Haynes, V.L. Mote, Samuel Paul

“ Price theory in the service of business executives is known as Managerial economics” - Donald Stevenson Watson

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What is Managerial Economics?Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization.”

Pappas & Hirschey - “Managerial economics applies economic theory and methods to business and administrative decision-making.”

Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”

Introduction to Managerial Economics

Goals of a business firm

- Single goal or multiplicity of goals

1. Profit maximization - Revenue maximization Cost minimization

2. Wealth maximization - Value maximization.

3. William J. Baumol - Sales revenue maximization - subject to attainment of desired profit target.

4. Williamson's modal – Managerial utility maximization

5. Edith Pen rose - Size (growth) Maximization

6 K.W. Rothschild - Long run survival –

Introduction to Managerial Economics

What is Microeconomics and Macroeconomics ? • Ragnor Frisch : Micro means “ Small” and Macro means

“Large”

Microeconomics deals with the study of individual behaviour. • It deals with the equilibrium of an individual consumer,

producer, firm or industry.

Macroeconomics on the other hand, deals with economy wide aggregates.

• Determination of National Income Output, Employment• Changes in Aggregate economic activity, known as Business

Cycles• Changes in general price level , known as inflation, deflation• Policy measures to correct disequilibrium in the economy,

Monetary policy and Fiscal policy

The Study of Economics

Macroeconomics concerned with aggregate behavior of the economy as a whole The big picture: growth,

employment, etc. Choices made by large groups

(like countries)

Microeconomics micro means a small part Concerned with analysis of behavior of individual economic variables such as individual consumer or a producer or price of a particular commodity How do individuals make

economic decisions

The Diverse Fields of Economics

Examples of microeconomic and macroeconomic concerns

Production Prices Income Employment

Microeconomics

Production/Output in Individual Industries and Businesses How much steelHow many officesHow many cars

Price of Individual Goods and Services Price of medical carePrice of gasolineFood pricesApartment rents

Distribution of Income and Wealth Wages in the auto industryMinimum wagesExecutive salariesPoverty

Employment by Individual Businesses & IndustriesJobs in the steel industryNumber of employees in a firm

Macroeconomics

National Production/Output Total Industrial OutputGross Domestic ProductGrowth of Output

Aggregate Price Level Consumer pricesProducer PricesRate of Inflation

National IncomeTotal wages and salaries  

Total corporate profits

Employment and Unemployment in the Economy Total number of jobsUnemployment rate

Three Big Microeconomic Questions

Goods and services are the objects that people value and produce to satisfy wants.Microeconomics seeks to understand what determines: What goods and services are produced How goods and services are produced For whom goods and services are produced

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Three Big Microeconomic Questions

What Goods and Services are Produced?

Figure 1.1 shows the major items produced in the Canadian economy today.It emphasizes the dominant place of services in our economy.

Three Big Microeconomic Questions

Figure 1.2 shows the trends in what the Canadian economy has produced over the past 50 years. It shows the decline of agriculture, mining, construction, and manufacturing, and the expansion of services.

Three Big Microeconomic Questions

The facts about what we produce raise the deeper question:What determines the quantities of houses and apartments, DVD players, and corn that we produce?Microeconomics provides some answers to these questions.

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Three Big Microeconomic Questions

How are Goods and Services Produced?Factors of production are the resources that businesses use to produce goods and services.They are grouped into four categories:

Land Labour Capital Entrepreneurship

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Three Big Microeconomic Questions

The “gifts of nature” that we use to produce goods and services are land.The work time and effort that people devote to producing goods and services is labour.The quality of labour depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.

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Three Big Microeconomic Questions

The tools, instruments, machines, buildings, and other constructions that are used to produce goods and services are called capital.The human resource that organizes land, labour, and capital is entrepreneurship.

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Three Big Microeconomic Questions

For Whom are Goods and Services Produced?Who gets the goods and services depends on the incomes that people earn. Land earns rent. Labour earns wages. Capital earns interest. Entrepreneurship earns profit.

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Introduction to Managerial Economics

Nature, Scope and Significance of Managerial Economics:

Managerial Economics – Business Economics Managerial Economics is ‘Pragmatic’(dealing with things sensibly and

realistically in a way that is based on practical rather than theoretical considerations) Managerial Economics is ‘Eclectic’(deriving ideas, style, or taste from

a broad and diverse range of sources) Managerial Economics is ‘Normative’(What ought to be) Universal applicability The roots of Managerial Economics spring from Micro

Economics Relation of Managerial Economics to Economic Theory is

much like that of Engineering to Physics or Medicine to Biology. It is the relation of applied field to basic fundamental discipline

Core content of Managerial Economics

Demand Analysis and forecasting of demand

Production decisions (Input-Output Decisions) Cost Analysis (Output - Cost relations)

Price – Output Decisions Profit Analysis Investment Decisions

The main function of a manager is decision making and managerial

Economics helps in taking rational decisions.

The need for decision making arises only when there are more

alternatives courses of action.

Steps in decision making :

Defining the problem

Identifying alternative courses of action

Collection of data and analyzing the data

Evaluation of alternatives

Selecting the best alternative

Implementing the decision

Follow up of the action

Functions of a Managerial Economists

Decision Problems faced by firms

What product to produce What should be the price of the product? What method of production to use What should be the size of the plant to be installed? How many workers should be employed? What is the optimal level of inventories of finished

products, raw material, spare parts, etc.? What should be the cost structure?

Whether or not to invest in new equipment

Specific functions to be performed by a managerial Economist :

1. Production scheduling

2. Sales forecasting

3. Market research

4. Economic analysis of competing companies

5. Pricing problems of industry

6. Investment appraisal

7. Security analysis

8. Advice on foreign exchange management

9. Advice on trade

10. Environmental forecasting

- Survey of British Industry by Alexander and

Kemp

Functions of a Managerial Economists:

Role a Managerial Economist in the Management Team:

William J. Baumol, “What Can Economic Theory Contribute to Managerial Economics?” American Economic Review, 1961

Baumol concludes that “a managerial economist can become a far

more helpful member of a management group by virtue of his studies of

economic analysis, primarily because there he learns to become an

effective model builder and because there he acquires a very rich body

of tools and techniques which can help him to deal with the problems of

the firm in a far more rigorous, a far more probing, and a far deeper

manner”.

SCOPE OF ECONOMICS

Scope means province or field of study. In discussing the scope of economics, we have to indicate whether it is a science or an art and a positive science or a normative science. It also covers the subject matter of economics.

Economics - A Science and an Art

Economics is a science: Science is a systematized body of knowledge that traces the relationship between cause and effect. Another attribute of science is that its phenomena should be amenable to measurement.

Applying these characteristics, we find that economics is a branch of knowledge where the various facts relevant to it have been systematically collected, classified and analyzed.

Economics investigates the possibility of deducing generalizations as regards the economic motives of human beings. The motives of individuals and business firms can be very easily measured in terms of money.

Thus, economics is a science.

Economics - A Social Science

In order to understand the social aspect of economics, we should bear in mind that labourers are working on materials drawn from all over the world and producing commodities to be sold all over the world in order to exchange goods from all parts of the world to satisfy their wants.

There is, thus, a close inter-dependence of millions of people living in distant lands unknown to one another.

In this way, the process of satisfying wants is not only an individual process, but also a social process. In economics, one has, thus, to study social behaviour i.e., behaviour of men in-groups.

Economics is also an art

An art is a system of rules for the attainment of a given end.

A science teaches us to know; an art teaches us to do.

Applying this definition, we find that economics offers us practical guidance in the solution of economic problems.

Science and art are complementary to each other and economics is both a science and an art.

Positive and Normative Economics

Economics is both positive and normative science. Positive science: It only describes what it is and normative science prescribes what it ought to be. Positive science does not indicate what is good or what is bad to the society. It will simply provide results of economic analysis of a problem.

Normative science: It makes distinction between good and bad. It prescribes what should be done to promote human welfare. A positive statement is based on facts. A normative statement involves ethical values.

For example, “12 per cent of the labour force in India was unemployed last year” is a positive statement, which could is verified by scientific measurement. “Twelve per cent unemployment is too high” is normative statement comparing the fact of 12 per cent unemployment with a standard of what is unreasonable.