Economics

MANAGERIAL ECONOMICS • 1.

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Definitions: “Managerial Economics is a fundamental academic subject which seeks to understand and to analyze the problems of business decision taking.” (D.C.Hayue) “It is the study of the allocation of the resources available to a firm or other unit of management among the activities of that unit.” (W.W.Haynes) Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision – making and forward planning by management.” (Milton Spencer and Louis Siegelman) “It is the application of economic theory to business management.”

•Direct concerned with real people in real business situations. •Decision making through M.E. is to be more professional, efficient and effective. •Its more meaningful, as co-ordinate with other branches of management. •Provides necessary skill to achieve business goal. •It concerns with the interaction between the internal operations of business firm and the economic environment. •It enlarge the firms product with better understanding of market. •Most managerial decisions are made under the condition of uncertainty of future.

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Nature of the M.Economics

Fundamental academic subject Economic Rational of Business administration Allocation of resources Micro-economic nature Theory of the firm Market conditions Macro setting Profit and pricing Basis for Decision-making Pragmatic approach Normative science Elements of macro economics Help of quantitative techniques Socio –cultural aspects

Role and Responsibilities • • • •

Basic Problem Organization of Business Demand estimation and forecasting. To anticipate the changes in costs and business conditions based on mkt. research and policy analysis. • To determine the nature and extend of competition. • To analyzing the issues and problems of the concerned industry. • Assisting the bus. Planning process. • Discovering new and possible fields of bus. Endeavour and its cost-benefit analysis.

• Advising on pricing, investment and capital budgeting policies. • Briefing the management on current domestic and global economic issues and emerging challenges. Interpretation, analysis and reporting of current economic matters, upcoming developments in business, government and foreign or global sector. • To help to understand the impact of the macro economic policies such as monetary, fiscal and industrial, adopted by the Govt. from time to time. • The bus. Economist has to keep watch of fast changing technological developments and it impacts. • They also help in financial management of the firm.

M.Economics positive or normative • Positive economics explains the economic phenomenon as what is, what was, and what will be. (like Physics, Chemistry etc.) • Normative prescribes what it ought to be. • According to the Robines eco. Is a positive science as it searches for truth. • According to the Marshall and Pigou it is a normative science because human welfare is its basic objective. • according to the Lord Keynes it is not to provide a body of settled conclusions immediately applicable in policy

Managerial Economic Analysis Real bus. world

Theoretical Bus. world

Hypothesis: relation among Bus. And eco. variables Model building

Observations/actual behaviour & Concern of actions: facts

Empirical measures: Data analysis

Predictions: Hypothesis testing

Decisions-making

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Managerial Economics and Micro Economics Demand analysis: study of price demand relationship, other determinants Theory of the firm Cost analysis Form market strategies Managerial Economics and Macro Economics A study of money market and banking services. The theory of international trade Social and legal responsibility of state Economic development of LDC and their role in international trade.

Basic Concept • • • • •

Optimization Marginal Analysis Opportunity Cost Economic Model Static and Dynamic

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Static Economics: A movement in any single direction, specific in time and extent with no uncertainty. Economy function in normal manner. “When production, consumption, distribution and exchanges are going on in a normal manner in an economy and, when there are no basic or fundamental changes in the economy, it is said that the economy is in a Stationary State or in a Static State.” Dynamic Economics: There is continuity in changes in economy. According to Prof. Baumol, “the characteristic feature of dynamic economics is its capacity to forecast future economic events and to study the present economic problems on the background of the events in the past and on the basis of future forecasts.”

DEMAND ANALYSIS • •

The law of “Diminishing Marginal Utility” “After consuming every additional unit the utility of that commodity falls down.” • The Marshallian cardinal approach to the theory of demand: 1. Concept of utility and its cardinal or numerical measurement. 2. The law of diminishing marginal utility 3. The law of equi-marginal

BASIC ASSUMPTIONS FOR THEORY • • • • • • • •

Cardinal utility Independent Utility Additive utility: Additions of IU Constant utility of Money Homogeneity Consistency Rationality Introspective or psychological analysis :human behaviour

LAW OF DEMAND • Definition: willingness of person to buy commodity of service backed by his purchasing power. • Law: “Other things remaining the same demand falls with increasing the price and demand increased with falls in price.” • Demand curve: Graphical presentation of law of demand. • Demand schedule: Tabular presentation of law of demand.

ASSUMPTIONS • • • • • •

No change in the taste and preferences No change in the fashion No change in the government policies No change in the customers income No change in the size of population No availability of close substitute

EXCEPTIONS • • • • • •

Giffen goods Prestigious goods Basic necessaries Expectations of future change in price Population Composite demand: demand for one commodity increased demand for other commodity • Habits • Customer ignorance

Factors Determine Demand 1. 2. 3. 4. 5. 6. 7. 8. 9.

Price of the Product Income and wealth distribution The availability of close substitute Consumer’s preferences, tastes and needs The size and structure of the of population Consumers expectations Advertisement Provisions of social security Other facilities

ELASTICITY Price Perfectly Perfectly Relatively Elastic Inelastic Elastic

Income Relatively Inelastic

Cross Unit Elasticity