Session_1.ppt
- 1. Learning Objectives • Define managerial economics – Relationship to microeconomics and related fields • Cite important types of decisions regarding allocation of scarce resources • Provide examples of how changes affect company’s ability to earn an acceptable return • Cite and compare the three basic economic questions from the standpoint of a country and a company
- 2. Economics and Managerial Decision Making • Economics is “the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.” (McConnell, 1993)
- 3. Economics and Managerial Decision Making • Management is the discipline of organizing and allocating a firm’s scarce resources to achieve its desired objectives. Involves the ability to organize and administer various tasks in pursuit of certain objectives.
- 4. Economics and Managerial Decision Making • Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.
- 5. Introduction • Spencer & Siegelman define Managerial Economics as “the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management” • Mansfield defines as “Managerial Economics is concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions”
- 6. Economic Theory •Micro Economics •Macro Economics Managerial Economics Decision Sciences •Econometrics •Mathematical Economics Helps Executives To reach optimal solutions to all management decision problems
- 7. Introduction to ME » Business decisions are taken in a fast changing socio- economic environment. » Almost all decisions, in one way or the other, relate to economic variables like demand, price, supply, stock, input, output, finance, profit and the like. » Under Managerial economics we will concentrate on these economic decision variables and the economic decision process. » Managerial economics does not provide ready made solutions to business problems. » It provides a tool-box of analysis and technique of thinking which can be helpful in conceptualising the problems faced by the management. » M E is supposed to enrich the conceptual and technical skill of a manager facing business decision problems.
- 8. Economic Analysis • Economic Problem and Economic Analysis Economic Problem is the problem of choice making and valuation. Scarcity is at the root of economic problem. We make choices between ends, between means, between use of means and satisfaction of ends. We constantly match ends to means; this is called economic activity.
- 9. Nature of Managerial Economics • It is micro-economic in character. Its unit of study is individual and not aggregates. • It is pragmatic in nature. It avoids abstract issues of economic theory and considers particular environment of decision-making. • It is normative i.e., prescriptive rather than descriptive. It is concerned with what decisions ought to be made. • It also uses macroeconomics as the same provides an understanding of the environment in which the business must operate.
- 10. Difference between Economics and Managerial Economics Economics 1. It deals with the body of principles of economic theory itself. 2. It is both micro as well as macro economics. 3. It deals with firms as well as individuals. 4.It incorporates simplified models of theory. 5. It is quite abstract as most of the models are based on ‘Ceteris Paribus’ assumption. 6. It is wider in scope. Managerial Economics Economic Principles are applied to problems of firms. It is applied micro economics. It deals only with firms. It modifies and enlarges models to suit specific conditions. It embodies complexities of real life situation in a competitive environment. It is narrower in scope.
- 11. Scope of Managerial Economics The following topics generally fall under Managerial Economics: Demand Analysis and Forecasting Cost Analysis Production & Supply Analysis Pricing Decisions, Policies & Practices Profit Management and Capital Management
- 12. Business Decisions • Business decisions are classified into categories depending upon the managerial function to which they relate to. • Financial decisions: Costing, budgeting, accounting,auditing,tax-planning, portfolio composition, capital structure, dividend distribution etc.
- 13. Contd….. • Production Decisions: Quantity and quality of product, choice of technology, product- mix, plant location and lay out, production scheduling, maintenance, pollution control etc. • Personnel Decisions: Recruitment, selection, induction, training, placement, promotion, transfer, retirement or retrenchment of staff.
- 14. Contd…. • Marketing Decisions: Sales volumes, sales force, sales promotion, market research, customer service, packaging, advertisement, new product positioning. • Misc Decisions: Purchasing, inventory control, information system, data processing, public relations etc.
- 15. Managerial Economics • ME concentrates on the decision process, decision model and decision variables at the firm level. • The firm is a part of an industry which exists in a given socio-economic environment of business. • The executives and managers, individually/jointly take, make and execute decisions. • Their operation reflects the behaviour and culture of the firm.
- 16. Subject Matter of ME Concepts/techniques Topics of ME Demand Analysis Demand decisions Prod-cost analysis Input-outputdecisions Mkt structure Ana Price-output decision Firm’ behaviour ana Profit Max. &other Project Appraisal Investment decisions Risk/uncertainty Economic forecasting
- 17. Managerial Economics and Other Subjects Managerial Economics is said to be closely related to other subjects like: Economics – Micro & Macro Mathematics Statistics Accounting & Operations Research
- 18. Decision Sciences • Mathematics, Statistics, econometrics are used in economic analysis. • Equations, graphs, diagrams, flow charts etc are used. • Intuitive appeal and logical reasoning will be required. • Regression may help the manager to forecast his sales based on past record but the manager must make sure that the user has not undergone any changes in Ts&Ps.
- 19. Operation research • Linear Programming as well as goal programming models are used in managerial decisions. • Calculus and Multiplier techniques of optimisation in specific situations is used.
- 20. Accountancy • The information on costs, inventories, receivables, revenue and profits are provided by the accountant. • Accounting profit Vs. economic profit and BEP and shut down concept of economics will be used.
- 21. Psychology and OB • Consumer behaviour is entirely based on psychology. • Behavioural models of the firm are drawn heavily from the organisational behaviour.
- 22. Economics and Managerial Decision Making • Questions that managers must answer: – What are the economic conditions in a particular market? • Market Structure? • Supply and Demand Conditions? • Technology? • Government Regulations? • International Dimensions? • Future Conditions? • Macroeconomic Factors?
- 23. Economics and Managerial Decision Making • Questions that managers must answer: – Should our firm be in this business? – If so, what price and output levels achieve our goals?
- 24. Economics and Managerial Decision Making • Questions that managers must answer: – How can we maintain a competitive advantage over our competitors? • Cost-leader? • Product Differentiation? • Market Niche? • Outsourcing, alliances, mergers, • acquisitions? • International Dimensions?
- 25. Uses of Managerial Economics Managerial Economics accomplishes several objectives: It presents the aspects of traditional economics which are relevant for business decision-making It helps in reaching optimal managerial decisions in a dynamic business environment. It incorporates useful ideas from other disciplines. It co-ordinates areas of finance, marketing etc. It makes a manager more competent in the dynamic competitive world.
- 26. Role of a Managerial Economist Normally Managerial Economist performs the following kind of specific functions:- Forecasting of demand and Supply Production Planning Capacity planning Product-mix determination Economic feasibility of new production lines. Pricing decisions Economic Analysis of Competing companies Industrial Market Research Preparation of periodic economic reports Keeping management informed of various national / international developments on economic matters. Participating in public debates
- 27. Review of Economic Terms • Microeconomics is the study of individual consumers and producers in specific markets. – Supply and demand – Pricing of output – Production processes – Cost structure – Distribution of income and output
- 28. Review of Economic Terms • Macroeconomics is the study of the aggregate economy. – National Income Analysis (GDP) – Unemployment – Inflation – Fiscal and Monetary policy – Trade and Financial relationships among nations
- 29. Review of Economic Terms • Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people.
- 30. Review of Economic Terms • Resources are factors of production or inputs. – Examples: • Land • Labor • Capital • Entrepreneurship
- 31. Review of Economic Terms • Opportunity cost is the amount or subjective value that must be sacrificed in choosing one activity over the next best alternative.
- 32. Review of Economic Terms • Because of scarcity, an allocation decision must be made. The allocation decision is comprised of three separate choices: – What and how many goods and services should be produced? – How should these goods and services be produced? – For whom should these goods and services be produced?
- 33. Review of Economic Terms • Economic Decisions for the Firm – What: The product decision – begin or stop providing goods and/or services. – How: The hiring, staffing, procurement, and capital budgeting decisions. – For whom: The market segmentation decision – targeting the customers most likely to purchase.
- 34. Review of Economic Terms • Three processes to answer what, how, and for whom – Market Process: use of supply, demand, and material incentives – Command Process: use of government or central authority, usually indirect – Mixed Process: use of both private and public entities in production process.
- 35. Review of Economic Terms • Entrepreneurship is the willingness to take certain risks in the pursuit of goals.
- 36. Basic Concept, Tools and Techniques of Analysis Certain concepts, tools and techniques which are constantly used in economic analysis are:- Assumption of ‘Ceteris Paribus’ Variables Functions Schedule Graphs Slope
- 37. MICRO ECONOMIC ANALYSIS 1. Derived from the Greek word ‘Mikros’ meaning small. 2. Its approach is individualistic. 3. The subject matter of microeconomics mainly consists of – Pricing, Distribution and Welfare. Microeconomics Pricing Distribution Welfare Demand theory Production theory Pricing theory Theories of Rent Wages Interest Profit
- 38. IMPORTANCE & USES OF MICROECONOMICS 1. It explains price determination and Allocation of resources. 2. It has direct relevance in Business Decision- making. 3. It serves as a guide for business / production planning. 4. It serves as a basis for prediction. 5. It is useful in determination of economic policies of Government. 6. It explains the phenomena of international trade.
- 39. LIMITATIONS OF MICROECONOMICS 1. Most microeconomic theories are abstract. 2. Most of the theories are static based on ‘ceteris paribus’ assumption. 3. It normally assumes ‘laissez faire’ policy. 4. It cannot explain the functioning of the economy at large. 5. Its at times misleading as it tries to generalise from individual behaviour.
- 40. MACRO ECONOMIC ANALYSIS 1. Derived from the Greek word ‘makros’ meaning ‘large’ 2. It is aggregative in nature. 3. It deals with the behaviour of the economy as a whole. 4. Its subject matter involves national income, total savings, total consumption, total investment, money supply, unemployment, economic growth etc.
- 41. USES AND LIMITATIONS OF MACROECONOMICS 1. Explains working of the whole economic system. 2. Knowledge helps in policy making and understanding. 3. Helps preparing economic plans & predictions. 4. Helps international comparisons. 5. Explains economic dynamism. LIMITATIONS • It ignores individual behaviour. • It has tendency of excessive generalisation. • Macro policies may not produce the same results at micro levels. • Macroeconomic predictions are not fully reliable as they could be based on inaccurate/incomplete information. • Macroeconomic analysis lacks precision.
- 42. DIFFERENCE BETWEEN MICRO & MACRO ECONOMICS MICRO ECONOMICS 1. Individualistic unit of study. 2. Subject matter – Product & Factor pricing, welfare theory. 3. Adopts slicing method i.e, dividing economy into small parts and then analysing behaviour. 4. Variables are considered to be independent. 5. Scope is limited. 6. It is concerned with individual welfare. MACRO ECONOMICS 1. Aggregative unit of study. 2. Subject matter – National Income, international trade, money & banking. 3. Adopts lumping method i.e., all units are combined and then behaviour is analysed. 4. Variables are considered interdependent. 5. Scope is wider. 6. It is concerned with aggregate welfare.