MANAGERIAL ECONOMICS

MODULE-1

INTRODUCTION

Managerial economics refers to the integration of economic theory with business practice. It deals with application of economics principle to the problems of business firms it modifies or reformulates already existing economics models to suit the specific problem of the business firms. It helps to solve real complex business problems using other related branches.

Definition
According to Prof. Joel Dean The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies.

NATURE OF MANAGERIAL ECONOMICS

It aims in providing help in making decisions by the firms as it draws heavily on the propositions of macro economics.

It assists the firm in forecasting as macro economics studies the economy at the aggregate level. It also helps to identify the level of demand at some future point based on the relationship between level of national income and demand for a particular product.
It helps on those propositions which are likely to be useful to the management, as decision has to be made without delay. Besides more accurate forecast may not justified on cost considerations

Managerial economics prescriptive in nature and character. It recommends that which should be done on alternative conditions. Managerial economics to an extent is an applied science Ex. Empirical study may suggest that for every one percent raise in expenditure on advertising the demand for the product shall increase by 0.5%.

Scope of Managerial Economics

Demand Analysis and Forecasting Cost and Production Analysis Inventory Management Advertising Market Structure and Pricing Policies Resource Allocation Capital Budgeting Investment Analysis Risk and Uncertainty Analysis

Demand analysis and forecasting

Demand analysis and forecasting is the process estimation of quantity of a product or service that will be demanded by the customer in the future. Demand forecasting is carried out using both, informal methods, like educated guesses or quantitative methods that involve the use of historical data or existing data from the test markets. Demand forecasting helps in the formulation of pricing strategies, estimation of future product capacity and making crucial decisions relating to the entry or exit from new market.

Cost and Production Analysis

In Economics, cost of production has a special meaning. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management required to produce a commodity. It represents money costs which we want to incur in order to acquire the factors of production".

Inventory Management
Inventory management is an integral part of a successful business. Inventories typically consist of goods, raw materials and finished products. Each of these elements translates into money for the business owner. The key to profitability is a carefully balanced inventory. Properly managing supplies requires the ability to create a balance. Part of the balancing approach should include aspects of inventories that many business owners fail to recognize. Issues that may be underestimated include: Storage cost Insurance Taxes Ordering dilemmas Pricing

Advertising
Advertising is a form of communication used to persuade an audience (viewers, readers or listeners) to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common. Advertising messages viewed via various traditional media; including mass media such as newspaper, magazines, television commercial adds, radio advertisement, outdoor advertising or direct mail; or new media such as websites and text messages.

Market Structure and Pricing Policies

Managerial Economics helps to clear surplus and excess demand to bring market equilibrium as there are continuous changes in market. Success of business firm depends on correctness of price decisions. Price theory works according to the nature of the market depending on the number of sellers, demand conditions etc.

Resource Allocation Managerial economics with the help of advance tools such as linear programming are used to arrive at the best course of action for the maximum use of the available resource and its substitutes.

Capital Budgeting

The process in which a business determines whether projects such as building a new plant or investing in a longterm venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Investment Analysis
It involves planning and control capital expenditure. Whether or not to invest funds in purchase of assets or other resources in an attempt to make profit and how to choose among completing uses of funds. Managerial economics help in analysis and decision making on the investment of funds.

Risk and Uncertainty Analysis

As business firm have to operate under conditions of risk and uncertainty both decision making and forward planning becomes difficult. Hence managerial economics helps the business firm in decision making and formulating plans on the basis of past data, current information and future prediction.

Role of Managerial Economist

in Decision making 1. Demand estimation and forecasting. 2. Preparation of business sales and forecast. 3. Analysis of market survey to determine the nature of market and extent of competition. 4. Analysis the issues and problems of concerned industry. 5. Assisting the business planning of the business firm.

6. Discovering new possible fields of business endeavor and its cost-benefit analysis. 7. Advising on prices, investment and capital budgeting policies. 8. Evaluation of capital budgeting, etc.,

Management Decision Problems

1. Product Price and Output 2. Make or Buy 3. Production Technique 4. Internet Strategy 5. Advertising Media and Intensity 6. Investment and Financing

The decision-making process involves the following steps:

Define the problem. Identify limiting factors. Develop potential alternatives. Analyze the alternatives. Select the best alternative. Implement the decision. Establish a control and evaluation system.

Micro and Macro economics

Micro Economics: Micro stands for millionth part or just a small part of the whole. In micro economics we analyze the part of a unit of the whole system. Ex. The behavior of an individual, firm or industry in the national economy. It is thus a study of a particular unit rather than all the units combined.

Micro Economics 1. Product pricing 2. Consumer behavior 3. Factor Pricing 4. Economic conditions of a section of the people. 5. Study of firms 6. Location of an industry.

Macro economics It is aggregative economics wherein the overall conditions of the economy such as total production, total consumption, total saving and total investments are studied. It is the study of overall economic development as a whole rather than its individual parts. It includes

Macro economics 1. National income and output 2. General price level 3. Balance of trade and payments 4. External value of money 5. Saving and investment 6. Employment and economic growth

Thank you