Chapter One.pptx
- 1. Chapter One: 1. THE NATURE AND SCOPE OF MANAGERIAL ECONOMICS What is Managerial Economics? =>Managerial economics (ME) constitutes economic theories and analytical tools that are widely applied to business decision Economics is a social science, it studies how households, firms,& nations, etc make decision to allocate their resources between competing needs of society so that economic welfare of the society can be maximized However, choice-making is not so simple as it looks because the economic work is very complex and most economic decisions have to be taken under the conditions of imperfect knowledge, risk and uncertainly. Thus economists in their endeavor to study the complex decision making process have developed analytical tools, techniques and economic theories with the aid of mathematics and statistics
- 2. Relationships between Managerial Economics and Related Disciplines ME is the integration of economics theory (application of Economics theory) with business practice for the purpose of facilitating decision making and forward planning by management. It uses analytical tools and a set of concepts to provide effective ways of thinking about decision problem Economic concepts Ex. Theory of market structure and pricing Decision sciences / tools Ex. optimization Managerial Economics Management Decision Problem Optimal solution to managerial decision problem
- 3. 1.1 IMPORTANCE OF MANAGERIAL ECONOMIC FOR MANAGERS in Agribusiness Since Agribusiness is part of the economy devoted to the production, processing, and distribution of food, including the financial institutions that fund these activities; First, it provides a framework for evaluating whether resources are being allocated efficiently with in the firm. It helps to identify the alternative means of achieving the given objectives, and then to select the alternative that accomplishes the objective in the most resource efficient manner, for example to determine if profit could be increased by substitute labor (variable cost) by technology (fixed cost)
- 4. 1.2 IMPORTANCE ME… Second, these principles help managers to respond to various economic signals. For example, an increase in prices of the output would be the appropriate signal to increase an output =>In Agribusiness market forces which affect the process of price determination, either directly or indirectly may be termed as ‘market forces’. =>The forces may be tangible, like the quantity and arrival at a particular point of time in the market or heavy rainfall; or Intangible like the announcement of government policy. =>All these factors affect the price determination by affecting either the demand behavior of the buyers or the supply behavior of the sellers
- 5. 1.2 SCOPE OF ME &THE BUSINESS ENVIRONMRNT `o Business Environment has reference to the broad characteristics of the economic system in which the business firm operates o For example, the overall economic policies, social factors and political atmosphere of the nation. Managerial economics, however, concerned with only the economic environment, and in particular with those economic factors which form the business climate. Some concept on Micro & Macro economics o Micro Economics focuses on individual economic behavior (individual households) and firms and their interaction in the market where resources are costly, e.g., how consumers respond to changes in prices and income, how businesses decide on employment and sales.
- 6. 1.2 SCOPE OF ME &THE BUSINESS… o On the other hand, macro economics deals with the aggregate economic variables or the economic system as a whole. It addresses question like the effect of changes in investment, government spending, employment, exchange rates, and inflation, unemployment, and import and export policies. o It shows how fiscal and monetary policies can keep the aggregate system working well => The scope of managerial economics to managerial issues is more limited to microeconomics. =>It should be thought with respect to micro economics focusing on those topics like demand, production, cost, pricing, and market structure
- 7. 1.3 ECONOMIC DECISIONS o Making an optimal economic decision is a very difficult task for most managers. o There is always a problem of choice when two or more alternative courses of action are variable. The act of choice signifying solution of an economic problem is economic decision making. o Since economic theories state general relationship between two or more economic events, they provide consistency in analysis, which helps in arriving at right conclusions. However, economic decision will be less risky to the extent the probability of the occurrence of the future events is correctly estimated.
- 8. 1.3 ECONOMIC DECISIONS …… o Economic decisions or business decisions are numerous in number and various in form most of these decision have got an economic content. o Managers of profit –seeking firms are faced with a wide range of important decisions in the areas of pricing, product choice, cost control, advertising, capital investments, and dividend policy, to name a few. – Managers in the not-for-profit and the public sectors are faced with a similarly wide range of decisions. For example, how to allocate funds among such competing needs like travel expenses, phone services, secretarial support, and the like. – Longer- range decisions may focus on new facilities, new programs, the purchase or lease of office equipments, and the decision to establish an executive training center.
- 9. 1.3 ECONOMIC DECISIONS Some of the business decisions, which have economic content, are discuss as follow Profit decision: as we see later on maximizing of profit is the objective of the firm. Profit decision may include decisions about level of profit, rate of profit reinvestment. Demand decision: the management of the firm has to estimate current and future demands for the output produced by the firm. It helps to allocate existing resources efficiently. Production decision: demand decision followed by production decision. The decision may include what, how, when and to whom produce. Moreover the decision goes to what should be the scale of production? What should be the product mix?
- 10. 1.3 ECONOMIC DECISIONS Price and output decisions: such decisions focus on in what price and in what quantity are the products sold in the commodity market in order to maximize the firm’s profit? Investment decision: the major issues related to such decision may be how much to invest? What should be the rate of investment? Or choice of investment projects.
- 11. 1.4 DECISION SYSTEMS AND PROCESS The ability to make good decisions is the key to successful managerial performance. The success of every decision depends mainly on decision process. Decision process refers to the procedure of making decision it involves co-ordination on the time scale, present problem, past date and future action. Decision process in each of those areas of decision shares a number of common elements and basically it includes five steps.
- 12. 1.4 DECISION SYSTEMS AND PROCESS…. This five-step decision-making process is illustrated in figure Establish and/or identify objectives Define the problem Identity possible alternative solutions Evaluate alternatives and select the best Implement and monitor the decision Consider societal constraints Consider organizational and input constrains
- 13. 1.4 DECISION SYSTEMS AND PROCESS…. First, the decision maker must establish or identify the objectives of the organization. The failure to identify organizational objectives correctly can result in the complete rejection of a well-convinced and well-implemented plan. Next, the decision maker must identify the problem requiring a solution. Third, once the source(s) of the problems is (are) identified, the manager can move to an examination of potential solutions. =>To provide potential solutions collection of data available facts and figures are important. If for example, the problem is the use of technologically inefficient equipment, two possible solutions may be proposed updating and replacing the plant’s equipment or building a completely new plant. .
- 14. 1.4 DECISION SYSTEMS AND PROCESS…. =>The choice between these alternatives depends on the relative data on cost and benefit, as well as other constraints that may make one alternative preferable to another Fourth, formulation of a model (a model is an analytical tool that helps for making decision under different situation). After all alternatives have been identified and evaluated the best alternatives have been chosen using the model. The final step in the process is the implementation of the decision. This phase often requires constant monitoring to ensure that results are as expected. If they are not, corrective action needs to be taken when possible.