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Managerial economics

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Managerial economics

  1. 1. PROJECT BY ANUJA M. CHAVAN F.Y. MFSM PROF. AVDHESH YADAV
  2. 2. Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals. Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways.
  3. 3. According to McNair and Merriam, "Managerial Economics consists of the use of economic modes of thought to analyze business situation."
  4. 4. Economics is: “the study of how people allocate scarce resources.”  Managerial economics focuses on how managers allocate their scarce resources: People Skills Office equipment Warehouses Machinery Raw materials 
  5. 5. Economics can be divided into two broad categories: micro economics : Microeconomics focuses on the behavior of the individuals on the economic stage, that is, firms and individuals and their interaction in markets. And macro economics: Macroeconomics is the study of economic system as a whole.
  6. 6. It is an application of the part of microeconomics that focuses on the topics that are of greatest interest and importance to managers. Managerial Economics includes: demand, production, cost, pricing, market structure, and  government regulations.     
  7. 7. Characteristics of Managerial Economics Managerial Economics is micro-economic in character. Managerial Economics largely uses that body of economic concepts and principles, which is known as 'Theory of the firm' or 'Economics of the firm‘. Managerial Economics is pragmatic.It avoids difficult abstract issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made. Managerial Economics, however, is concerned with what decisions ought to be made and hence involves value judgments.
  8. 8.    Production and Supply Production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms. Production analysis mainly deals with different production functions and their managerial uses. Supply analysis deals with various aspects of supply of a commodity. Certain important aspects of supply analysis are supply schedule, curves and function, law of supply and its limitations. Elasticity of supply and Factors influencing supply.  Pricing Decisions, Policies and Practices  Pricing is a very important area of Managerial Economics. In fact, price is the ness of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the prices decisions taken by it. The important aspects dealt with under this area are :- Price Determination in various Market Forms, Pricing methods, Differential Pricing, Product-line Pricing and Price Forecasting.  Profit Management  Business firms are generally organized for the purpose of making profits and, in long run, profits provide the chief measure of success. In this connection, an important point worth considering is the element of uncertainty exiting about profits because of variations in costs and revenues which, in turn, are caused by torso both internal and external to the firm. If knowledge about the future were fact, profit analysis would have been a very easy task. However, in a world of certainty, expectations are not always realized so that profit planning and measurement constitute the difficult are of Managerial Economics. The important acts covered under this area are :- Nature and Measurement of Profit, Profit Testing and Techniques of Profit Planning like Break-Even Analysis.  Capital Management  Of the various types and classes of business problems, the most complex and able some for the business manager are likely to be those relating to the firm’s investments. Relatively large sums are involved, and the problems are so complex that their disposal not only requires considerable time and labour but is a term for top-level decision. Briefly, capital management implies planning and trolls of capital expenditure. The main topics dealt with are :- Cost of Capital, Rate return and Selection of Project.
  9. 9. Principle of Economics can help a Manager in taking decisions in various business situations. These can be summarized with the help of the following diagram –
  10. 10.  We need to understand the reasons for consumption, factors affecting consumption, constraints faced by the consumers, the decision-making process of the consumer as regards price to be paid, quantity to be purchased, allocation of resources between different needs, etc.  Theory of Demand helps in developing an understanding between Price and quantity demanded. Price Elasticity helps us understand the ability and willingness to pay of different categories of consumers. This also helps us in Market segmentation.   Cross Price Elasticity helps in identifying competitors which may not be essentially within the same product category – eg. Should softdrinks manufacturers be seen as competitors for Tea?  Theory of Consumer’s Equilibrium helps in understanding how a consumer allocates his income between different needs. Having understood the various factors that affect demand for a product and the decision-making process of a consumer helps business managers in devising more effective sales, marketing and advertising strategies. 
  11. 11.           Production is perhaps the most important activity in a business organization. A Business Manager has to take several decisions regarding production – eg. What to produce, what should be the plant capacity, what should be the capacity utilization, which technology to use, etc. While organizing of production activity, Business Managers have to take several factors into consideration, such as – (a) Objective of the Firm – To begin with the firm has to decide its objective. A Firm could have various objectives such as profit maximization, sales maximization, maximization of market share, etc (b) Profit Maximization – In traditional theory we examine a firm that has profit maximization as its central objective. In order to maximize profits a firm has to minimize costs and maximize its revenues. Thus, a deeper understanding of the Costs and Revenues is required for achieving this objective. (c) Revenues – Revenues of a firm depend on the demand scenario and the competitive scenario in the market. The understanding of the above two would be essential for a business manager to predict the revenues that the business will be able to generate. (d) Demand scenario – To decide on the plant capacity and capacity utilization, an understanding of quantity demanded in the market in different time periods is important (e) Market Structures – In addition to the quantity demanded, one has to understand the competitive scenario. How many players are competing for the given market demand? What is the market structure and how will it impact the firm’s own sales? (f) Costs – In order to maximize profits, a firm needs to minimize costs. Costs are impacted by several factors. Primary among them are quantity of production and factor prices. (g) Technology – Technology has multi-dimensional impact on costs. On one hand technology determines what combination of various factors is to be used – eg. capital-intensive technology or labor intensive technology. (h) Factor Pricing – Technology dictates a certain combination of factors that need to be used.
  12. 12.       Finally, businesses operate in a given social, political and economic environment. There is a symbiotic relationship between the business and its environment. A business organization, through its operations, causes an impact on the surrounding socio-economic conditions. So also, the socioeconomic environment prevailing in the outer world has an impact on the business. From time to time, Business Managers are required to foresee the changes in the outer world, analyze their likely impact on their business and take necessary corrective actions. Events from the economic environment such as changes in government policies, tax structures, trade regulations, changes in key variables such as interest rates, inflation, etc., business cycles and growth projections are some of the important events that directly or indirectly impact every business activity. Knowledge of macroeconomics is quite often required to be able to predict these events in the economy and understand the likely impact of these changes on business.
  13. 13. As pointed out earlier, a Business Manager deals with a group of human beings plating different roles – e.g.. consumers, suppliers, share-holders, workers, etc.  Economics studies the fundamental motivating factors behind behavior of these different economics agents.  This knowledge would thus help the Business Manager in influencing behavior of these economic agents in a manner that enables the business to achieve its objectives. 
  14. 14. An important part of study of economics is to understand the decision criterion of different economic agents such as consumers, firms, workers, etc.  Economics aims at arriving at a logical method of arriving at a decision given the objectives that the economic agent has to achieve and the constraints within which she operates.  This technique is helpful to a Business Manager in taking the numerous decisions that she is required to take during the course of her work. 
  15. 15. The above techniques of decision-making studied in economics can be used for taking a wide range of decisions including those regarding allocation of resources, capital management, distribution and logistics, etc.  e.g.. If a decision has to be taken for distributing a capital of Rs. 1 million between various used A, B and C, the technique of Marginal Analysis tells us that the Capital should be distributed in such a manner that the marginal returns from each use is equal. 
  16. 16. The decision criteria tells what information would be required so as to enable us to take the right decision.  One can use this input in designing a proper MIS that is relevant and useful  e.g.. In the above case the MIS should be designed to give the manager information about marginal returns. Instead, if the MIS gives information about average and total returns, it would not help in the decisionmaking process. 
  17. 17. Economics introduces us to certain differences between good accounting decisions and good business decisions.  It tells us how a result which may seemingly be good and proper in accounts may, in-fact be a wrong business decision.  e.g.. it may not be taking into account opportunity costs or replacement costs. 
  18. 18.      Economics helps Business Managers in enlarging their scope of Cost-Benefit Analysis. Economics informs us that the C-B Analysis should not be looked at from the narrow perspective of immediate increase in profitability to business. Along with this a more comprehensive Social CostBenefit Analysis is also essential to understand the long-term implications of business on the economy and the society. Such an understanding can also be leveraged to enhance the overall profitability of business. e.g.. Ability of business to generate employment in the economy can be used as leverage in extracting tax concessions from the government.

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