Introduction to Managerial Economics.ppt

in this topic we are going to learn managerial economics where we explore how businesses make informed decisions in a constantly changing economic landscape

1. Introduction to Managerial
Economics

2. Learning Objectives:
Define and discuss the role and objectives, concepts
And principles relative to managerial economics

8. Economics
Economics:‘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.’

9. Economics
Ittalksabout‘EconomicActivity’
and‘EconomicProblem’.
‘ItistheStudyofLogicchoicebetweenScarce
resourcesandunlimitedwants’
‘Economicsistogettheanswertothebasicquestions
ofaneconomysuchas,Whattoproduce?,Howto
produce?Andforwhomtoproduce?’
‘Economics is the social science that is concerned with
the production, distribution, and consumption of
goods and services.’

10. Economics
Those activities of mankind are studied which are concerned with earnings
and spending of money.
For the successful handling of these activities certain laws and rules are
formulated which are known as various theories of economics.
Use of these rules & tools provided for analysing business conditions and
applying them for arriving at various economic decision is known as
managerial economics.

27. Meaning & Definition of Managerial Economics
According to Spencer and Siegelman, “ Managerial Economics may be
defined as the integration of economictheory with business practice for the
purpose of facilitating decision makingand forward planningby
management.”
Decision Making: Means selecting one out of a set of two or more alternatives
or in other words, making a choice.
Planning: Means planning for the business activities to be undertaken for
future.
( The problem of selection arises because the supply of factors of production
(land, labour, capital and enterprise) is scarce or limited.)
Managerial Economics helps management in making right decisions and
planning for the future under the condition of uncertainty.

28. Other Definitions of Managerial Economics
According to McNair and Meriam, “ Business Economics consists of
the use of economic modes of thought to analyse business situation.”
According to Joel Dean, “The purpose of managerial economics is to
show how economic analysis can be used in formulating business
policies.”
In the words of Joseph L. Messy, “ Business Economics is the use of
economic theories by the management in making business decisions.

29. After the study of various definitions it can be concluded
that:
Managerial Economics is that branch of knowledge in which theories
of economic analysisare used for solving businessmanagement
problemsand determination of business policies.
Managerial Economics serves as a bridge between Economics and
Business Management.

30. Managerial Economics
Branch of Economics.
‘Managerial Economics is the study of Economic
Theories, Principles and Conceptswhich is used in
Managerial Decision Making.’
‘Managerial Economics is the Application of various
Theories, Concepts and Principles of Economicsin
the Business Decisions.’
It also Includes ‘The Application of Mathematical and
Statistical tools in Management decisions.’

31. Managerial Economics
Economic
Theories,
Principles
and
Concepts.
Manageri
al
Decision
Making.
Applicati
on
Applicati
on
Application of Mathematical
And Statistical tools

32. Managerial Economics
Managerial Decisions
Choice of product
Choice 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

33. Managerial Economics
Economics.
Theories
Principles
Concepts
Decision Making.
Selection of best alternative out of various possible
alternatives.
Risk &Uncertainty

34. 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.

35. Scope of Managerial Economics
1)DemandAnalysisandForecasting:Demandanalysisandforecastingof
demandfacilitatesthedecisionmakingandforwardplanning.Ifdemand
forecastingofafirmiscorrect,thefirmearnsmoreprofitandiftheyare
wrongitsufferslosses.
2)ProductionPlanningandManagement:Everyfirmisengagedincertain
production,henceithastoplanandmanagetheproduction.Firmhasto
makeprofitabledecisionskeepingitsfactorsofproductionandtheproductin
view.
3)CostAnalysis:Oneoftheimportantresponsibilitiesofbusinessmanagersis
toanalyzeandcontrolcostsinordertomaximizetheprofit.Itcanbedone
onlybytheproperinvestigationandresearchabouttherespectivecosts.
4)PricingPoliciesandPractices:Decidingthepriceisoneoftheimportant
subjectofbusinesseconomics.Thesuccessofafirmdependsupondecisions
regardingprices.

36. Scope of Managerial Economics
5)ProfitManagement:Managerialeconomicshelpsinanalysisofprofit
measurementandcontrol.
6)CapitalManagement:Capitalmanagementinbusinesseconomicsincludes
costofcapital,profitabilityofthecapitalandtheselectionofsuitableproject
orprojectsoutofvariousprojects.
7)DecisionTheoryunderUncertainty:Uncertaintiesaremanyfoldsuchas
uncertaintyofdemand,uncertaintyofcost,uncertaintyofcapitaletc.Many
statisticalmethodsaredevelopedfortakingdecisionunderconditionofsuch
uncertainties.

37. Responsibilities of Managerial Economist
1)Tomakereasonableprofitoncapitalemployed:Economist’smain
obligationistoassistthemanagementinearningreasonableprofisoncapital
investedbythefirm.
2)SuccessfulForecasting:Economistmustaimatlesseningifnotfully
eliminatingtheriskinvolvedinuncertainties.
3)ContactwithSourcesandSpecialistsofinformation(inordertocollect
quicklytherelevantandvaluableinformationinthefield.
4)StatusintheFirm

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

39. 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.

40. Decision???????????????
How to take decision????????????
By using….
Economic Models

41. 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.

42. 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.

43. Firm:-Firm is a business organisation that buys or hires
factors of production in order to produce goods and services
that can be sold at a profit.
Objective of firm:-The standard economic assumption
underlying the analysis of firms is profit maximization. Firms
are assumed to make decisions that will increase profit.
Generally speaking, profit maximization is the process of
obtaining the highest possible level of economic profit
through the production and sales of goods and services. For a
more thorough discussion of this topic, see the profit
maximization entry. Real world firms might pursue other
objectives including: (1) sales maximization, (2) pursuit of
personal welfare, and (3) pursuit of social welfare. In some
cases, these other objectives help a firm pursue profit
maximization. In other cases, they prevent a firm from
maximizing profit.

44. OBJECTIVE OF FIRM
Sales maximisation
Profit maximisation
Utility maximisation
Welfare maximisation
Growth maximisation
Objectives
of firm

45. OBJECTIVE S OF TOP COMPANIES
APPLE
RELIANCE
INDIANOIL
SAMSUNG

46. To expand their sales to customers who have not yet own any Apple’s
products.
To produce hassle free products that provides service and enjoyment for
customers.
Become the leading business in the mobile market.
RELIANCE LTD.
Create synergetic effect by creating high quality and diversified portfolio.
Provide diversified financial services with focused people.
Diversification of sources of fund.
Enhance Corporate value through sustained growth.

47. To serve the national interests in oil and related sectors in accordance
and consistent with Government policies.
To maximize utilization of the existing facilities for improving efficiency
and increasing productivity.
To earn a reasonable rate of return on investment.
To serve the national interests in oil and related sectors in accordance
and consistent with Government policies.
SAMSUNG COMPANY
To extend amongst members the knowledge and appreciation of
computers, automatic data processing systems and Computer based
automatic control system, and of theory.
To foster an informed public opinion regarding computation and
computing machinery and techniques .
To take interest in the general professional welfare of the members.
To do such other things as the Society may think incidental or conducive
to the attainment of the objects of the Society.

48. Basic Principles of Managerial
Economics
Opportunity cost principle.
Equi-marginalism principle.
Incremental principle.
Discounting principle.

49. Opportunity Cost Principle
Choice involves sacrifice.
The cost involved with the sacrifice
It 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.’

50. Opportunity Cost
EXAMPLE: an individual has $25 to either
purchase groceries or new clothes.The individual
weighs the choices against each other and decides
that it’s more important to eat for the week and
forgo the new pair of jeans.The opportunity cost
of the groceries is……

51. Equi-marginalism Principle
Allocation of scarce resources on different alternative
uses should be equally distributed.
Equi-marginal Principle implies thata consumer
will distribute his/her income over various goods in a
way that the marginal utility derived from the last unit
of money spent on each good is equal.

52. 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

53. 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.