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CHAPTER-1

MANAGERIAL ECONOMICS: MEANING, NATURE, SCOPE, AND IMPORTANCE


AUTHOR: DR. JASWINDER SINGH

MEANING OF ECONOMICS
Economics is defined by taking four viewpoints, which are explained as follows:
Wealth Viewpoint: Represents the classical perspective of economics. According to Adam Smith, economics is a science of wealth. He is regarded as the father of economics. Welfare Viewpoint: Represents a neo-classical standpoint of economics. Alfred Marshall, a neo-classical economist, associated the term economics with man and his welfare. Scarcity Viewpoint: Refers to the pre-Keynesian thought of economics. Lionel Robbins defined economics as a science of scarcity or choice. Growth Viewpoint: Indicates the modern perspective of economics. Paul Samuelson outlined three main aspects, namely human behavior, allocation of resources, and alternative uses of resources.
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NATURE OF ECONOMICS
Economics as a Science: Refers to the scientific nature of economics. Some economists believed that in economics, a problem is solved by adopting a scientific approach, which involves collecting and analyzing data and making related laws and theories. Economics as a Social Science: Implies that economics is a study of behavior patterns of human beings. The basic function of economics is to study how individuals, households, organizations, and nations utilize their limited resources to achieve maximum profit. Therefore, it can be said that economics is a social science.

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BRANCHES OF ECONOMICS
Microeconomics: Refers to a branch of economics that examines the performance and behavior of individual organizations and consumers in an economy. It involves the study of supply and demand patterns and price and output determination of individual markets. Macroeconomics: Refers to a branch of economics that studies the performance and behavior of the whole economy. It undertakes the study of economic aggregates, such as changes in employment, national income, rate of growth, Gross Domestic Product (GDP), inflation, and price levels.

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CONCEPT OF MANAGERIAL ECONOMICS

Managerial economics is concerned with the application of economic concepts and economics to the problems of formulating rational decision making. --- Mansfield
Managerial economics is concerned with the application of economic principles and methodologies to the decisionmaking process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management. --- Douglas

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APPLICATION OF MICROECONOMICS
Demand Theory
Refers to a theory that is applied to understand the buying behavior of consumers.

Production Theory
Refers to the theory that explains the relationship between input and output.

Price Theory
Involves determining the price of a product or services under different market conditions.

Profit Theory
Helps organizations to measure the return on capital and total profit.

Capital Theory
Enables managers to make capital and investment decisions, which determine the success of an organization.
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APPLICATION OF MACROECONOMICS
The macroeconomic theory deals with issues related to the general business environment in which an organization operates. The environmental issues can be associated with the economic, political, and social environment of a country. The economic environment of a country includes economic system, national income, employment, population, saving, investment, financial sector, foreign trade, and poli8tical system of a country. Macroeconomics helps in the study of all the factors comprises the economic environment of a country.
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IMPORTANCE OF MANAGERIAL ECONOMICS


Helps in taking decisions related to type of product, investment, pricing, and level of production Enables managers to select production techniques and best course of action Comprises various economic concepts, such as demand theory, production theory, and capital theory, which helps in studying and analyzing dif ferent business problems Helps organization in making future decisions with respect to economic variables, such as price, demand, supply, and cost

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IMPORTANCE OF MANAGERIAL ECONOMICS (CONTD.)


Applies dif ferent economic theories and tools to the real world business environment Enables organizations to determine and analyze factors that af fect business decisions Helps in formulating business policies Helps in assessing relationship between dif ferent economic variables, such as demand, supply, income, employment, and profit

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DISTINCTION BETWEEN ECONOMICS AND MANAGERIAL ECONOMICS


Economics It is a science that studies human behavior with respect to unlimited wants and limited resources. Managerial Economics It is a science that studies managerial behavior with respect to economic principles used for business decision making.

It is a traditional and well-established discipline. It is an extremely theoretical subject. Economics is a positive as well as normative science.

It is a new and emerging discipline.

It is a practical subject. Managerial economics is only a normative science.


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DISTINCTION BETWEEN ECONOMICS AND MANAGERIAL ECONOMICS (CONTD.)


Economics It deals with a set of economic principles. Managerial Economics It applies economic principles in business decision making. It studies both economic and noneconomic factors of a problem.

It studies only economic factors of a problem.

It deals with the theories of distribution, such as It deals with theories that help rent, interest, wages, and profit. organizations in maximizing profits.

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MANAGERIAL ECONOMICS IN OTHER DISCIPLINES


Mathematics
An application of mathematical tools in economic concepts not only provides clarity, but also helps in designing a logical framework to measure relationship between different economic variables.

Statistics
An organization uses various statistical tools to collect and analyze business data as well as to check the validity of the data before it is applied to business analysis.

Operational Research
Makes use of different economic concepts, mathematical techniques, and statistical tools to build models for solving various business problems.

Management theory and accounting


Management theories help in determining the behavior of an organization while it is striving to achieve certain predetermined goals and objectives. On the other hand, accounting helps an organization to know its functioning and performance.

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ROLE OF A MANAGERIAL ECONOMIST


Forecasting sales of an organization Performing individual market research Performing economic analysis of rival organizations Analyzing the pricing policy of the industry; thereby formulating the pricing policy of the organization Performing investment analysis Assisting the top management in making decisions related to trade and public relations and foreign exchange Performing capital budgeting and production planning Measuring the earning capacity of an organization Keeping the top management informed regarding any changes in the business environment
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MAJOR ECONOMIC PROBLEMS


What to produce: An organization faces problems related to the selection of a product to be produced in the present market conditions to get maximum profit. How to produce: An organization also faces problems related to the selection of techniques to be used for producing goods or ser vices.

For whom to produce: Refer s to a problem related to the distribution of products and ser vices among the dif ferent sector s of the economy.
Economical u se of resources: Refers to a problem of making optimum use of limited resources so that the wants of human beings can be satisfied. Problem related to g rowth: Refer s to the problem related to the continuous development of the economy.
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DECISION MAKING PROCESS


Setting Objectives: Refers to the first step of the decision making process. It is necessary for an organization to define the objectives of taking a particular decision. Defining the problem: Refers to the second step in which the actual problem of an organization is identified. Identifying the causal factors: Involves determining the factors that may af fect the decision. Finding out alternatives: Refers to the step in which all the possible alternatives are generated for solving a problem.

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DECISION MAKING PROCESS (CONTD.)


Collecting information: Involves gathering data with respect to the alternatives generated so that they can be properly analyzed. Evaluating information: Refers to the step in which the collected data is analyzed so that best alternative can be selected. Implementing the alternative and monitoring results: Refers to the last step in which an organization puts the selected alternative into practice.

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RECAP
Economics studies how individuals, households, organizations, and nations utilize their limited resources to achieve maximum profit. Economics is divided into two parts, namely microeconomics and macroeconomics. Managerial economics is an applied branch of economics that deals with economic concepts and tools used in business decision making. Managerial economics deals with the analysis of economic theories and laws to solve business problems and take decisions based on rational thinking. These business problems can be related to demand and supply prospects of an organization, level of production, pricing, market structure, and extent of competition.
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