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Managerial Economics. Prof. Rama Deshmukh. What is Management ? Duties ,functions and role of manager What is Economics? Definition of Managerial Economics Relationship to Economic Theory Relationship to decision science Business environment and managerial economics
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Managerial Economics Prof. Rama Deshmukh
What is Management ? Duties ,functions and role of manager • What is Economics? • Definition of Managerial Economics • Relationship to Economic Theory • Relationship to decision science • Business environment and managerial economics • Scope of Managerial economics
What is management • Evolution and present scenario
Modernbusiness 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.
The term Managerial Economics involves 2 terms; former refers to acts and decisions of manager later to a subject –matter. • What is management ?
What is Economics ? • It is a science of earning and spending wealth as defined by the Father of Economics Adam Smith in his classic work ‘An enquiry into nature and causes of the Wealth of Nations.’ • In the opinion of Alfred Marshall it was study of mankind in ordinary business of life. • Lionel Robbins gave us the most accepted scarcity-oriented definition of Economics. He says Economics is a social science which studies human behavior as a relationship between unlimited wants and scarce means which have alternative uses.
Definition of Managerial Economics • According to Mansfield ,managerial economics is applied microeconomics. • Whether profit or non-profit making organisations and whatever may be their goals , they have all to face constraints which may be internal & /or external. • THE BASIC DECISION-MAKING PROCESS IS SAME FOR ALL FIRMS. • All managerial decision problems are solved with the help of tools ,concepts and principles in….a) Economic theory; b) Managerial economics c) Mathematical economics. • Role of economic theory---- In any business, the businessman has to decide what , how ,when ,how much , whom , where etc.
There arises question of choice at every stage of production. eg. Choice regarding selection of project, location of plant ,inputs , funds etc. • The manager has to study environment at Micro as well as Macro levels. • Micro economics here the subject-matter is individual consumer ,firm market , industry etc. Theories under micro-economics are :Theory of value, theory of distribution, theory of economic welfare etc. • Macro-economic environment is general eco-pol-social condition of the larger system which may be at domestic & /or international level.
Role of mathematical economics and econometrics---- • Mathematical economics is used to formalize economic laws. Eg. Law of demand can be expressed mathematically as Q =25 -3 (p) here demand is dependent variable and price independent variable ;moreover demand is inversely related to price. • Econometrics is application of statistics to real world. Empirically collected data can be applied to equations to find solution. eg. • Q= f (Y, Px , Py , W , U , T ,E ----- ) • Trends revealed by forecasting help a firm take optimal decisions.
Business environment and managerial economics-- • Business environment refers to all those forces which influence functioning of business. • Two types of factors are relevant here-1)Internal factors :these are controllable; either altered or modified. 2) External factors- these are beyond control • Example of internal factors: corporate philosophy, physical assets , management structure, human resources , R &D , FINANCE , technology etc. • Example of external factors :Customers , suppliers , competitors , natural factors ,demographic changes , political situation , eco-social condition , government policies etc.
Scope of managerial economics- Studies 8 different areas • Demand • Cost Analysis • Pricing policies • Profit management • Capital Management • Inventory management • Marketing and advertising • Whether it is setting of new machinery/plant or recruiting /laying off labor-
Basic Concepts • Rationality • Positive and Normative Economics • Alternative economic systems • Value and price • Utility and demand • Marginalism / Marginal analysis
Rationality Many casual observers of the subject argue that the relevance of the subject hinges on the selfish nature of the humankind since it deals only with satisfying the material desires. But economist recognize that people act for variety of reasons, some selfish some humanitarian. The point is that the action of whichever type will be influenced by the cost and benefit. As an activity becomes more costly it is less likely to be chosen. Person is likely to try to save the life of the boy in three feet swimming pool rather than the rapid current approaching Nigara Falls.
Positive and Normative economics • Stating the facts as it is. • Making the judgment about hoe the things should be.
Alternative economic systems • What to produce? • How to produce? • For whom to produce? • Market economy • Command economy • Mixed economy
