Ae-Ec1 PDF

**Ae-Ec1** **Managers** -in their day-to-day activities, are always confronted with several issues such as how much quantity is to be supplied; at what price; should the product be made internally; or whether it should be bought from outside; how much quantity is to be produced to make a given amo...

**Ae-Ec1** **Managers** -in their day-to-day activities, are always confronted with several issues such as how much quantity is to be supplied; at what price; should the product be made internally; or whether it should be bought from outside; how much quantity is to be produced to make a given amount of profit and so on. **Managerial Economics** -it is an offshoot of two distinct disciplines: Economics and Management -it necessary to understand what these disciplines (Economics and Management) are, at least in brief, to the understand the nature and scope of managerial economics **Economics** -the study of human activity both at individual and national level **Economists of early age** -treated economics merely as the science of wealth **Economic Activities** -such activities of earning and spending money **Economics** -during the 18^th^ century was defined by **Adam Smith**, the father of economics, as the study of nature and uses of national wealth **Dr. Alfred Marshall** -one of the greatest economists of the 19^th^ century -he writes "Economics is a study of man's actions in the ordinary business of life; it enquires how he gets his income and how he uses it" -he observed that the chief aim of economics is to promote human welfare', but not wealth **AC Pigou** -endorses the opinion of Marshall -he defines economics as "the study of economic welfare that can be brought directly and indirectly, into relationship with the measuring rod of money" **Prof. Lionel Robbins** -he defined economics as "the science, which studies human behavior as a relationship between ends and scarce means which have alternative uses" **Lord Keynes** -he defined economics as 'the study of the administration of scarce means and the determinants of employment and income" **Microeconomics** -the study of an individual consumer or a firm -deals with behavior and problems of single individual and of micro-organization -also called *Theory of Firm* **Micro** -means one 'millionth' **Managerial Economics** -has its roots in microeconomics and deals with the micro or individual enterprises -it is concerned with the application of the concepts such as price theory, Law of Demand and theories of market structure and so on **Macroeconomics** -the study of aggregate or total level of economics activity in a country -it studies the flow of economics resources or factors of production from the resource owner to the business firms and then from the business firms to the households -it studies the interrelations among various aggregates and examines their nature and behavior... -concerns with the level of employment in the economy **Management** -it is the science and art of getting things done through people in formally organized groups **MANAGEMENT INCLUDES A NUMBER OF FUNCTIONS:** 1. Planning 2. Organizing 3. Staffing 4. Directing 5. Controlling **Manager** -while directing the efforts of his staff communicates to them the goals, objectives, policies, and procedures; coordinates their efforts; motivates them to sustain their enthusiasm; and leads them to achieve the corporate goals **Welfare Economics** -is that branch of economics, which primarily deals with taking of poverty, famine, and distribution of wealth in an economy -this is also called *Development Ecenonoics* -its central focus is to is to assess how well things are going for the members of the society -takes care of what managerial economics tends to ignore **Prof. Amartya Sen** -he was awarded the Nobel Prize in Economics in 1998 in recognition of his contributions to welfare economics -he gained recognition for his studies of the 1974 famine in Bangladesh -his work has challenged the common view that food shortage is the major cause of famine **Famine** -in the words of Prof. Sen, this can occur even when the food supply is high but people cannot buy the food because they don't have money **Democratic country** -there has never been a famine because the leader of those nations spurred into action by politics and free media **Managerial Economics** -as a subject, gained popularity in USA after the publication of the book 'Managerial Economics" by Joel Dean in 1951 -refers to the firm's decision-making process -it could also be interpreted as "Economics of Management" or "Economics of Management" -it is also called "Industrial Economics" or "Business Economics" **Joel Dean** -he observed that managerial economics shows how economic analysis can be used in formulating polices **E. F. Brigham and J. L. Pappas** -in their words, Managerial Economics Is "the application of economics theory and methodology to business administration practice" **C. I. Savage & T. R. Small** -they therefore believe that managerial economics \"is concerned with business efficiency\" **M. H. Spencer and Louis Siegelman** -they explain the \"Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management\" **Managerial Economics** -deals with economic aspects of managerial decisions of with those managerial decisions, which have an economics contest -it may therefore, be defined as a body of knowledge, techniques and practices which give substance to those economic concepts which are useful in deciding the business strategy of a unit of management -it is designed to provide a rigorous treatment of those aspects of economic theory and analysis that are most use for managerial decision analysis says J. L. Pappas and **E. F. Brigham** -focuses on those tools and techniques, which are useful in decision-making -perhaps, the youngest of all the social sciences **THE OTHER FEATURES OF MANAGERIAL ECONOMICS:** 1. **Close to microeconomics** -managerial economics is concerned with finding the solutions for different managerial problems of a particular firm 2. **Operates against the backdrop of macroeconomics** -the macroeconomics conditions of the economy are also seen as limiting factors for the firm to operate. In other words, the managerial economist has to be aware of the limits set by the macroeconomics conditions such as government industrial policy, inflation and so on 3. **Normative statements** -usually includes or implies the words 'ought' or 'should' -they reflect people\'s moral attitudes and are expressions of what a team of people ought to do 4. **Prescriptive actions** -is goal oriented -given a problem and the objectives of the firm, it suggests the course of action from the available alternatives for optimal solution -if does not merely mention the concept, it also explains whether the concept can be applied in a given context or not 5. **Applied in nature** 6. **Offers scope to evaluate each alternative** -managerial economics provides an opportunity to evaluate each alternative in terms of its costs and revenue. The managerial economist can decide which is the better alternative to maximize the profits for the firm. 7. **Interdisciplinary** -the contents, tools and techniques of managerial economics are drawn from different subjects such as economics, management, mathematics, statistics, accountancy, psychology, organizational behavior, sociology and etc. 8. **Assumptions and limitations** -every concept and theory of managerial economics is based on certain assumptions and as such their validity is not universal. Where there is change in assumptions. the theory may not hold good at all. **Models** -are built to reflect the real-life complex business situations and these are of immense help to managers for decision-making **Managerial Economist** -can decide which is the better alternative to maximize the profits for the firm **Scope of Managerial** -economics refers to its area of study **Managerial Economics** -provides management with a strategic planning tool that can be used to get a clear perspective of the way the business world works and what can be done to maintain profitability in an ever-changing environment -is primarily concerned with the application of economic principles and theories to five types of resource decisions made by all types of business organizations **SCOPE OF MANAGERIAL ECONOMICS:** 1. The selection of products or services to be produced 2. The choice of production methods and resource combinations 3. The determination of the best price and quantity combination 4. Promotional strategy and activities 5. The selection of the location from which to produce and sell goods or service to consumer **THE SCOPE OF MANAGERIAL ECONOMICS COVERS TWO AREAS OF DECISION-MAKING:** 1. Operational or Internal issues 2. Environmental or External issues **Operational issues** -refer to those, which wise within the business organization and they are under the control of the management **Operational Issues are:** 1. Theory of demand and Demand Forecasting 2. Pricing and Competitive strategy 3. Production cost analysis 4. Resource allocation 5. Profit analysis 6. Capital or Investment analysis 7. Strategic planning **Demand Analyses and Forecasting** -a firm can survive only if it is able to the demand for its product at the right time, within the right quantity \*Understanding the basic concepts of demand is essential for demand forecasting **Demand Analysis** -should be a basic activity of the firm because many of the other activities of the firms depend upon the outcome of the demand for cost **DEMAND ANALYSIS PROVIDES** 1. The basis for analyzing market influences on the firms; products and thus helps in the adaptation to those influences 2. Demand analysis also highlights for factors, which influence the demand for a product. This helps to manipulate demand. Thus, demand analysis studies not only the price elasticity but also income elasticity, cross elasticity as well as the influence of advertising expenditure with the advent of computers, demand forecasting has become an increasingly important function of managerial economics **Pricing and Competitive Strategy** -pricing decisions have been always within the preview of managerial economics **Pricing policies** -are merely a subset of broader class of managerial economic problems **Price theory** -helps to explain how prices are determined under different types of market conditions **Competitions analysis** -includes the anticipation of the response of competitions the firm\'s pricing, advertising and marketing strategies **Product line pricing and price forecasting** -occupy an important place here Production analysis -is in physical terms **Cost analysis** -is in monetary terms \*Cost concepts and classifications, cost-out-put relationships, economies and diseconomies of scale and production functions are some of the points constituting cost and production analysis **Resource Allocation:** **Managerial Economics** -is the traditional economic theory that is concerned with the problem of optimum allocation of scarce resources **Marginal analysis** -is applied to the problem of determining the level of output, which maximizes profit **Linear programming techniques** -in this respect, has been used to solve optimization problems **Lines programming** -is one of the most practical and powerful managerial decision-making tools currently available **Profit Making** -the major goal of firms **Profit Theory** -guides in the measurement and management of profit, in calculating the pure return on capital, besides future profit planning **Capital** -the foundation of business -lack of it may result in small size of operations **THE MAJOR ISSUES RELATED TO CAPITAL ANALYSIS ARE:** 1. The choice of investment project 2. Evaluation of the efficiency of capital 3. Most efficient allocation of capital \*Knowledge of capital theory can help very much in taking investment decisions. **Strategic Planning** -provides management with a framework on which long-term decisions can be made which has an impact on the behavior of the firm -is now a new addition to the scope of managerial economics with the emergence of multinational corporations -contrast to project planning **Project Planning** -focuses on a specific project or activity **Corporate economics** -integration of managerial economics and strategic planning has given rise to this **Environmental Issue** -in managerial economics, it refers to the general business environment in which the firm operates -they refer to thew general economic, social and political atmosphere within which the firm operates **A STUDY OF ECONOMIC ENVIRONMENT SHOULD INCLUDE:** 1. The type of economic system in the country 2. The general trends in production, employment, income, prices, saving and investment 3. Trends in the working of financial institutions like banks, financial corporations, insurance companies 4. Magnitude and trends in foreign trade; 5. Trends in labor and capital markets 6. Government\'s economic policies viz. industrial policy monetary policy, fiscal policy, price policy etc. **Social Environment** -refers to social structure as well as social organization like trade unions, consumer\'s co-operative etc. **Political Environment** -refers to the nature of state activity, chiefly states\' attitude towards private business, political stability etc. **Environmental Issues** -highlight the social objective of a firm i.e.; the firm owes a responsibility to the society \*Private gains of the firm alone cannot be the goal **Environmental or External Issues** -relate managerial economics to macroeconomic theory **Operational Issues** -relate the scope to micro economic theory **Scope of Managerial Economics** -is ever widening with the dynamic role of big firms in a society **MANAGERIAL ECONOMICS RELATIONSHIP WITH OTHER DISCIPLINES** 1. **Relationship with economics** -the relationship between managerial economics and economics theory may be viewed form the point of view of the two approaches to the subject Viz. Micro Economics and Macro Economics **Microeconomics** -is the study of the economic behavior of individuals, firms and other such micro-organizations **Managerial economics** -is rooted in Micro Economic theory **Managerial Economics** makes use to several Micro Economic concepts such as marginal cost, marginal revenue, elasticity of demand as well as price theory and theories of market structure to name only a few **Macro theory** -is the study of the economy as a whole -it deals with the analysis of national income, the level of employment, general price level, consumption and investment in the economy and even matters related to international trade, Money, public finance, etc. \*The relationship between managerial economics and economics theory is like that of engineering science to physics or of medicine to biology **Managerial Economics** -has an applied bias and its wider scope lies in...