Lecture 1-Introduction to managerial economics.pptx

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1. Introduction to Managerial Economics

2. Expected Learning Outcomes At the end of this unit, you will be expected to: Understand the meaning and importance of managerial economics Understand the relevant phases in business decision making processes Be familiar with the scope of Managerial Economics Be able to discuss freely how managerial economics can fill the gap between theory and practice

3. Introduction The discovery of managerial economics as a separate course in management studies has been attributed to three major factors: The growing complexity of business decision-making processes, because of changing market conditions and the globalization of business transactions. b. The increasing use of economic logic, concepts, theories, and tools of economic analysis in business decision-making processes. c. Rapid increase in demand for professionally trained managerial manpower.

4. Definition of Managerial Economics Managerial Economics is the study of economic theories, logic and tools of economic analysis that are used by mangers in the process of business decision making. Economic theories and techniques of economic analysis are applied to analyze business problems, evaluate business options and opportunities with a view to arriving at an appropriate business decision. On the other hand, managerial economics is the application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions. It is drawn heavily from quantitative techniques such as regression analysis, correlation and calculus.

5. Definition of Managerial Economics One standard definition for economics is the study of the production, distribution, and consumption of goods and services. A second definition is the study of choice related to the allocation of scarce resources. The first definition indicates that economics includes any business, non-profit organization, or administrative unit. The second definition establishes that economics is at the core of what managers of these organizations do.

6. Definition of Managerial Economics Managerial economics has been generally defined as the study of economic theories, logic and tools of economic analysis, used in the process of business decision making. It involves the understanding and use of economic theories and techniques of economic analysis in analyzing and solving business problems. Managers with some working knowledge of economics can perform their functions more effectively and efficiently than those without such knowledge. Taking appropriate business decisions requires a good understanding of the technical and environmental conditions under which business decisions are taken.

7. Definition, Scope, and Nature of Business Economics Business e conomics applies economic theory and methods to solve business problems. Scope includes demand analysis, production and cost analysis, pricing, and market structures. Nature: Both science (systematic) and art (practical application).

8. Structure, Conduct, and Performance (SCP) Framework Structure: Market size, entry barriers, number of firms. Conduct: Pricing strategies, advertising, R&D. Performance: Profitability, efficiency, and innovation. Widely used to assess industry competitiveness.

9. Importance of Managerial Economics In a nutshell, three major contributions of economic theory to business economics have been enumerated Building of analytical models that help to recognize the structure of managerial problems, eliminate the minor details that can obstruct decision making, and help to concentrate on the main problem area. Making available a set of analytical methods for business analyses thereby, enhancing the analytical capabilities of the business analyst. Clarification of the various concepts used in business analysis, enabling the managers avoid conceptual pitfalls.

10. Importance of Economics in Business Decision-Making Helps managers allocate scarce resources efficiently. Provides tools for forecasting demand and supply. Aids in pricing, investment, and production planning. Enhances risk management and strategic planning.

11. Business Decisions and Economic Analysis   Business decision-making basically involves the selection of best out of alternative opportunities open to the business organization. Decision making processes involve four main phases:   Determining and defining the objective to be achieved.   Collection and analysis of information on economic, social, political, and technological environment.   Inventing, developing and analyzing possible course of action   Selecting a particular course of action from available alternatives.

12. Business Decisions and Economic Analysis If for instance, a business firm plans to launch a new product for which close substitutes are available in the market, one method of deciding whether or not this product should be launched is to obtain the services of a business consultant. The other method would be for the decision- maker or manager to decide. In doing this, the manager would need to investigate and analyse the following thoroughly: (a) production related issues; and, (b) sales prospects and problems.

13. Business Decisions and Economic Analysis With regards to production, the manager will be required to collect and analyse information or data on: i . available production techniques; ii. cost of production associated with each production technique; iii. supply position of inputs required for the production process; iv. input prices; v. production costs of the competitive products; and, vi. availability of foreign exchange, if inputs are to be imported.

14. Business Decisions and Economic Analysis Regarding the sales prospects and problems, the manager will be required to collect and analyze data on: a. general market trends; b. the industrial business trends; c. major existing and potential competitors, as well as their respective market shares; d. prices of the competing products; e. pricing strategies of the prospective competitors; f. market structure and the degree of competition; and, g. the supply position of complementary goods.

15. Business Decisions and Economic Analysis It is in this kind of input and output market analysis that knowledge of economic theories and tools of economic analysis aid the process of decision making in a significant way. The application of economic theories in solving business problems helps in facilitating decision-making in the following ways: First, it can give clear understanding of the various necessary economic concepts, including demand, supply, cost, price, and the like that are used in business analysis. Second, it can help in ascertaining the relevant variables and specifying the relevant data. For example, in deciding what variables need to be considered in estimating the demand for two different sources of energy, petrol and electricity. Third, it provides consistency to business analysis and helps in arriving at right conclusions.

16. Scope of Managerial Economics Managerial economics comprises both microeconomics and macroeconomics theories. Both microeconomics and macroeconomics are applied to business analysis and decision making either directly or indirectly. Generally, the scope of managerial economics extends to those economic concepts, theories, and tools of analysis used in analysing the business environment, and to find solutions to practical business problems.

17. Role of Microeconomics and Macroeconomics in Business Microeconomics: Consumer behavior, firm behavior, and market structures. Pricing and output decisions. Macroeconomics: Inflation, unemployment, and national income. Fiscal and monetary policy impacts on business. Exchange rates and international trade effects.

18. Scope of Managerial Economics In broad terms, managerial economics is applied economics. The areas of business issues to which economic theories can be directly applied is divided into two broad categories: a. Operational or internal issues; and, b. Environment or external issues.

19. Scope of Managerial Economics Operational issues are micro in nature and also internal in nature. These problems include all those problems which arise within the business organization and fall within the control of management. Some of the basic internal issues include and questions that the management must provide solutions to include: i . choice of business and the nature of product (what to produce); ii. choice of size of the firm (how much to produce); iii. choice of technology (choosing the factor combination); iv. choice of price (product pricing); v. how to promote sales; vi. how to face price competition; vii. how to decide on new investments; viii. how to manage profit and capital; and, ix. how to manage inventory.

20. Scope of Managerial Economics Some of the microeconomics theories that deals with most of these internal or operational issues include:   Theory of demand: which explains the consumer behaviour in terms of decisions on whether or not to buy a commodity and the quantity to be purchased.   Theory of Production and production decisions: The theory of production or theory of the firm explains the relationship between inputs and output.   Analysis of Market structure and Pricing theory: Price theory explains how prices are determined under different market conditions.

21. Scope of Managerial Economics Profit analysis and profit management : Profit making is the most common business objective. However, making a satisfactory profit is not always guaranteed due to business uncertainties. Profit theory guides firms in the measurement and management of profits, in making allowances for the risk premium, in calculating the pure return on capital and pure profit, and for future profit planning. Theory of capital and investment decisions : Capital is the foundation of any business. It efficient allocation and management is one of the most important tasks of the managers, as well as the determinant of the firm’s success level. Some of the important issues related to capital include: choice of investment project; assessing the efficiency of capital; and, the most efficient allocation of capital.

22. Scope of Managerial Economics Environmental or External issues are issues related to the general business environment. These are issues related to the overall economic, social, and political atmosphere of the country in which the business is situated. The factors constituting economic environment of a country include: i . Type of economic system ii. General trends in production, income, employment, prices, savings and investment. iii. Structure of the financial institutions. iv. Magnitude of and trends in foreign trade. v. Trends in labour and capital markets. vi. Government’s economic policies. vii. Social organizations, such as trade unions, consumers’ cooperatives, and producer unions. viii. The political environment. ix. The degree of openness of the economy.

23. Bridging Gap and Theory Gap exists due to simplifying assumptions (e.g., ceteris paribus) • Models may not fit reality perfectly But they provide: • Framework for logical thinking • Roadmap for decision-making

24. Role of Managerial Economics Guides managers to: • Identify problems • Gather & analyze data • Evaluate alternatives • Draw logical conclusions • Make rational decisions

25. Test Your Knowledge 1. Discuss how Managerial Economics integrates theory with practice. 2. Why is it relevant to business managers? 3. What is the nature and scope of Managerial Economics? 4. How does it bridge the gap between theory and practice?

26. Discussion Questions 1. How does business economics differ from pure economics? 2. Why is forecasting demand important for managers? 3. In what ways do macroeconomic policies affect business operations? 4. How can SCP framework help in evaluating an industry? 5. Give an example where an economic model guided a real-world business decision.