Managerial Economics PDF

MANAGERIAL ECONOMICS TOPICS TO BE COVERED Why study economics? Macro vs Micro-Economics  Managerial economics Circular flow of economic activity Objectives of the firm  Principles of Economics ECONOMICS AND MANAGERIAL ECONOMICS Economics: how individuals and societies choose to use...

MANAGERIAL ECONOMICS TOPICS TO BE COVERED Why study economics? Macro vs Micro-Economics  Managerial economics Circular flow of economic activity Objectives of the firm  Principles of Economics ECONOMICS AND MANAGERIAL ECONOMICS Economics: how individuals and societies choose to use scarce resources (micro vis-à-vis macro). The world’s resources are limited and scarce. The resources which are not scarce are called free goods. Resources that are scarce are called economic goods. Vital for managerial decision making, designing and understanding public policy, and appreciating how an economy functions. Students: What goes on in the world and how it can be used as a practical tool for decision making. Managers and CEO’s: Understanding of how market forces create both opportunities and constraints for business enterprises. Managerial Economics: how scarce resources are directed most efficiently to achieve managerial goals. It is a valuable tool for analyzing business situations to make better decisions. It is well integrated with other disciplines. MICRO VS MACRO ECONOMICS Microeconomics The study of an individual consumer or a firm is called microeconomics (also called the theory of firm). Micro means ‘one millionth’. Microeconomics deals with behaviour and problems of single individual and of micro-organisation. Macroeconomics The study of ‘aggregate’ or total level of economic activity in a country is called macro economics. It studies the flow of economics resources or factors of production (such as Land, Labour, Capital, Organisation, and Technology) from there source owner to the business firms and then from the business firms to the households.  NEED VS WANTS People have a limited number of needs that must be satisfied for survival (material / psychological/emotional needs etc.) To enjoy a better standard of living, people would go beyond the basic level as human wants are unlimited Want: desire for the consumption of goods and services Therefore the basic economic problem is that the resources are limited but wants are unlimited which forces us to make choices Economics: allocation of resources, the choices that are made by economic agents. Economy: system which attempts to solve this basic economic problem. There are different types of economies; household economy, local economy, national economy, and international economy but all economies face the same problem ❑ What to produce? ❑ How to produce? ❑ When to produce? ❑ For whom to produce? CIRCULAR FLOW OF ECONOMICS CONTINUE….. Circular flow of activity is a chain in which production creates income, income generates spending, and spending, in turn, induces production. Clockwise : Circular flow of economic activities Anticlockwise : Circular flow of goods and services DEFINITION OF MANAGERIAL ECONOMICS Prof. Evan J Douglas: Managerial Economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or organization under the conditions of uncertainty Milton H Spencer and Louis Siegelman: Managerial Economics is the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management Mc Nair and Miriam: Managerial Economics consists of the use of economic modes of thoughts to analyze business situations. SCOPE OF MANAGERIAL ECONOMICS Managerial decision areas Production Reduction or control of costs Determination of Techniques of price of a given Micro Optimum product or service economics solutions Make or buy decisions Inventory decisions Capital management Profit planning and management Investment decisions MAIN AREAS OF MANAGERIAL ECONOMICS 1.Demand decision 2.Input-output decision 3.Price out-put decision 4.Profit-related decision 5.Investment decision 6.Economic forecasting and forward planning CHIEF CHARACTERISTICS OF MANAGERIAL ECONOMICS. Following are the important feature of managerial economics 1) Managerial economics is Micro economic in character. Because it studies the problems of a business firm, not the entire economy. 2) Managerial economics largely uses the body of economic concepts and principles which is known as “Theory of the Firm” or “Economics of the firm”. 3) Managerial economics is pragmatic. It is purely practical oriented. So Managerial economics considers the particular environment of a firm or business for decision making. 4) Managerial economics is Normative rather than positive economics (descriptive economics). Managerial economics is prescriptive to solve particular business problem by giving importance to firms aim and objectives. 5) Macro economics is also useful to managerial economics since it provides intelligent understanding of the environment in which the business is operating. 6) It is management oriented. PRINCIPLES OF ECONOMICS Principles of how people make decisions 1. People face Trade off 2. The cost of something is what you give up to get it (opportunity Cost) 3. Rational people think at margin 4. People respond to incentives PRINCIPLES OF HOW PEOPLE INTERACT 5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Govt can sometimes improves the markets. PRINCIPLE OF HOW ECONOMY WORKS AS A WHOLE. 8. A country’s standard of living depends on its ability to produce the goods and service. 9. Prices rise when govt prints too much money. 10. Society faces a short run trade off between inflation and unemployment.