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Unit 1 Introduction to Managerial Economics (Page no. 1-5) Demand Analysis (Page no. 7-19) www.apnenotes.co
Downloaded from www.apnenotes.co 1 INTRODUCTION TO MANAGERIAL ECONOMICS Introduction  Should an electronic goods manufacturer cut the price of its best-selling television set in response to a rival company’s launching of a new model?  Should a commercial bank go for internet banking?  Should a publisher offer more trade discount in response to a new competitor’s entry into the market of educational books?  Should a pharmaceutical firm undertake a promising but costly R&D programme?  What tender should a construction company submit to get a road construction contract from municipal corporation in a city?  In all the above situations the common element is DECISION MAKING  Prime function of any organisation is Decision making and forward planning. Decision Making and Forward Planning ▪ Decision making is the process of selecting one course of action from two or more alternative courses of actions ▪ Forward planning means establishing plans for the future ▪ Decision making is a continuous process through uncertain future. ▪ In fulfilling the function of decision making in an uncertain frame work economics theory can be used with considerable advantage. ▪ The way economic analysis can be used towards solving business problems constitute the subject matter of MANAGERIAL ECONOMICS Definitions of Managerial Economics 1. According to Mc Nair and Meriam managerial economics consists of use of economic mode of thought in analysing business situations. 2. Spencer and Siegelman have defined managerial economics as the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning of the management 3. Managerial economics is the discipline which deals with the application of economic theory to business practice. 4. Managerial economics lies on the borderline between economics and business management and serves as a bridge between the two disciplines Chief Characteristics of Managerial Economics 1. It is microeconomic in nature. The unit of study is firm
Downloaded from www.apnenotes.co 2 2. It largely uses body of economic principles and concepts. Therefore, it is called theory of the firm or economics of the firm 3. Managerial economics is pragmatic in nature (solves problems in practical and sensible way rather than having fixed ideas and theories) 4. It belongs to normative science rather than positive. It is prescriptive rather than descriptive. It is concerned with what decisions ought to be made. It involves value judgements and has two aspects i) It tells what aims and objectives a firm should pursue ii) also, it tells how best to achieve these aims in particular situations. Therefore, managerial economics has been described as Normative micro economics of the firm. 5. Macroeconomics is also useful as it provides intelligent understanding of the environment Differences Between Managerial Economics and Economics Managerial Economics Economics 1. It involves application of economic principles 2. It is micro economic in nature 3. Though it is micro economic, it deals only with firms 4. It adopts, modifies and reformulates economic models to suit to specific conditions and serves problem solving process 5. It introduces feedback on various issues and thus embodying complexities and attempting to solve real life business problems using tool subjects like mathematics, statistics, accounting, operations research, marketing research etc., 1. It deals with the body of principles itself 2. It is both micro and macro-economic in nature 3. It deals with individuals as well as firms 4. It hypothesizes economic relationships and build economic models 5. It makes certain assumptions Scope of Managerial Economics  Scope refers to area of study  Managerial economics provides management with a strategic planning tool: a. Provides clear perspective of business world b. How should firm remain profitable in a changing environment
Downloaded from www.apnenotes.co 3 Primary decision areas  Choosing the product or service  Choice of production methods and resource combination  Determination of best price and quantity combination  Promotional strategies and activities  Selection of location to produce and sell Scope-Two broad areas of decision making Concepts and techniques of managerial economics are applied on two broad areas of decision making:  OPERATIONAL or INTERNAL ISSUES • ENVIRONMENTAL or EXTERNAL ISSUES Scope –Operational issues ❖ Demand analysis and forecasting ❖ Cost analysis ❖ Production analysis ❖ Pricing decisions, policies and practices ❖ Profit management ❖ Capital management Demand analysis and forecasting  Demand analysis refers to theory that is applied to understand buying behaviour of consumers. This theory helps identify various factors influencing the demand for a firm’s product and thus provides guidelines to manipulate demand Cost analysis  One way to earn higher profits is by controlling the costs involved in producing the product. Study of costs is necessary for making efficient and effective managerial decisions. The factors causing variations in costs must be identified if a manager has to arrive at cost estimates. An element of cost uncertainty exists because all the factors determining costs are not always known and controllable. If detailed cost analysis is done, the firm can move upon to effective profit management and pricing practices Production analysis  When the business organization converts raw material or resources to finished products, there are various economic issues involved. Production analysis helps to arrive at most profitable decision with regard to efficient use of resources available to