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MANAGERIAL ECONOMICS (MEANING AND NATURE) MEANING Managerial economics is economics applied in decision making.

It is the branch of economics which serves as a link between abstract theory and managerial practice. It is based on the economic analysis for identifying problems, organizing information and evaluating alternatives. DEFINITIONS OF MANAGERIAL ECONOMICS Managerial economics is the of economic modes of thought to analyse business situation Mc.Nair and Meriam Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management. Managerial economics as defined by Edwin Mansfield is "concerned with application of the economic concepts and economic analysis to the problems of formulating rational managerial decision." DEFINITION OF ENGINEERING ECONOMICS Engineering economics, previously known as engineering economy, is a subset of economics for application to engineering projects. Engineers seek solutions to problems, and the economic viability of each potential solution is normally considered along with the technical aspects.

SCOPE OF MANAGERIAL ECONOMICS The scope of managerial economics includes following subjects: 1. Theory of demand (Demand Analysis) 2. Theory of production (Production Analysis) 3. Theory of exchange or price theory (Pricing Decision) 4. Theory of profit (Profit Analysis) 5. Theory of capital and investment (Investment Analysis) 6. Environmental issues: 1. Theory of Demand: According to Spencer and Siegelman, A business firm is an economic organisation which transforms productivity sources into goods that are to be sold in a market. a. Demand analysis: Analysis of demand is undertaken to forecast demand, which is a fundamental component in managerial decision-making. Demand forecasting is of 8 Managerial Economics importance because an estimate of future sales is a primer for preparing production schedule and employing productive resources. Demand analysis helps the management in identifying factors that influence the demand for the products of a firm. Thus, demand analysis and forecasting is of prime importance to business planning.

b. Demand theory: Demand theory relates to the study of consumer behaviour. It addresses questions such as what incites a consumer to buy a particular product, at what price does he/she purchase the product, why do consumers cease consuming a commodity and so on. It also seeks to determine the effect of the income, habit and taste of consumers on the demand of a commodity and analyses other factors that influence this demand. 2. Theory of Production: Production and cost analysis is central for the unhampered functioning of the production process and for project planning. Production is an economic activity that makes goods available for consumption. Production is also defined as a sum of all economic activities besides consumption. It is the process of creating goods or services by utilising various available resources. Achieving a certain profit requires the production of a certain amount of goods. To obtain such production levels, some costs have to be incurred. At this point, the management is faced with the task of determining an optimal level of production where the average cost of production would be minimum. Production function shows the relationship between the quantity of a good/service produced (output) and the factors or resources (inputs) used. The inputs employed for producing these goods and services are called factors of production. a. Variable factor of production: The input level of a variable factor of production can be varied in the short run. Raw material inputs are deemed as variable factors. Unskilled labour is also considered in the category of variable factors. b. Fixed factor of production: The input level of a fixed factor cannot be varied in the short run. Capital falls under the category of a fixed factor. Capital alludes to resources such as buildings, machinery etc. Production theory facilitates in determining the size of firm and the level of production. It elucidates the relationship between average and marginal costs and Managerial Economics in production. It highlights how a change in production can bring about a parallel change in average and marginal costs. Production theory also deals with other issues such as conditions leading to increase or decrease in costs, changes in total production when one factor of production is varied and others are kept constant, substitution of one factor with another while keeping all increased simultaneously and methods of achieving optimum production. 3. Theory of Exchange or Price Theory: Theory of Exchange is popularly known as Price Theory. Price determination under different types of market conditions comes under the wingspan of this theory. It helps in determining the level to which an advertisement can be used to boost market sales of a firm. Price theory is pivotal in determining the price policy of a firm. Pricing is an important area in managerial economics. The accuracy of pricing decisions is vital in shaping the success of an enterprise. Price policy impresses upon the demand of products. It involves the determination of prices under different market conditions, pricing methods, pricing policies, differential pricing, product line pricing and price forecasting. 4. Theory of profit: Every business and industrial enterprise aims at maximising profit. Profit is the difference between total revenue and total economic cost. Profitability of an organisation is greatly influenced by the following factors: Demand of the product Prices of the factors of production Nature and degree of competition in the market Price behaviour under changing conditions

5. Theory of Capital and Investment: Theory of Capital and Investment evinces the following important issues: Selection of a viable investment project Efficient allocation of capital 10 Managerial Economics Assessment of the efficiency of capital Minimising the possibility of under capitalisation or overcapitalisation. Capital is the building block of a business. Like other factors of production, it is also scarce and expensive. It should be allocated in most efficient manner. 6. Environmental issues: Managerial economics also encompasses some aspects of macroeconomics. These relate to social and political environment in which a business and industrial firm has to operate. This is governed by the following factors: The type of economic system of the country Business cycles Industrial policy of the country Trade and fiscal policy of the country Taxation policy of the country Price and labour policy General trends in economy concerning the production, employment, income, prices, saving and investment etc. General trends in the working of financial institutions in the country General trends in foreign trade of the country Social factors like value system of the society CHARACTERISTICS / NATURE OF MANAGERIAL ECONOMICS 1. Microeconomics: It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market. 2. Normative economics: It is concerned with varied corrective measures that a management undertakes under various circumstances. It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision-making and optimal utilisation of available resources, come under the banner of managerial economics. 3. Pragmatic: Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed, based on certain exceptions, which are far from reality. However, in managerial economics, managerial issues are resolved daily and difficult issues of economic theory are kept at bay. 4. Uses theory of firm: Managerial economics employs economic concepts and principles, which are known as the theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory.

5. Takes the help of macroeconomics: Managerial economics incorporates certain aspects of macroeconomic theory. These are essential to comprehending the circumstances and environments that envelop the working conditions of an individual firm or an industry. Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the successful functioning of a business.

MANAGERIAL ECONOMICS RELATED WITH OTHER DISCIPLINES: Managerial Economics and Traditional Economics Economics and Managerial economics both are facing identical problems ,i.e., problem of scarcity and resource allocation. Since labour and capital are always limited it must find way for effective utilizing of these resources. ITS MAIN CONTRIBUTION TO MANAGERIAL ECONOMICS HELP IN UNDERSTANDING THE MARKET CONDITIONS AND THE GENERAL ECONOMIC ENVIRONMENT WITHIN WHICH THE FIRM OPERATES. TO PROVIDE THE PHILOSOPHY FOR UNDERSTANDING AND ANALYSING THE RESOURCE ALLOCATION PROBLEMS MANAGERIAL ECONOMICS AND OPERATIONS RESEARCH Both operations research and managerial economics are concerned with taking effective decisions, managerial economics is a fundamental academic subject which seeks to understand and to analyse the problems of business decision making while OR is an activity carried out by functional specialist within the firm to help the manager to do his job of solving decision problems. ITS MAIN CONTRIBUTION TO MANAGERIAL ECONOMICS OR models like queuing, linear programming etc.., are widely used in managerial economics Model building, economic models are more general and confined to broad economic decision making MANAGERIAL ECONOMICS AND MATHEMATICS Mathematics is closely related to managerial because managerial economics ,being conceptual but also metrical.Its metrical property is used to estimate and predict the relevant economic factors for decision making and forward planning. ITS MAIN CONTRIBUTION TO MANAGERIAL ECONOMICS Geometry, algebra and calculus Logarithms and exponential, vectors and determinants, input-output tables etc., Even OR can be included as a part of mathematical exercise MANAGERIAL ECONOMICS AND STATISTICS Statistics is widely used in managerial economics. It is mainly needed for a correct judgement and decision making ITS MAIN CONTRIBUTION TO MANAGERIAL ECONOMICS To handle the unforeseen circumstances the theory probability is mainly used. MANAGERIAL ECONOMICS AND THE THEORY OF DECISION MAKING The theory of decision making is relatively a new subject that has significance for managerial economics. Much of economic theory is based on the single goal MAXIMISATION OF PROFIT, but theory of decision making recognizes the multiplicity of goals and the pervasiveness of uncertainty.

MEANING OF FIRM Definition of firm A firm is the small business unit involved in producing the profit Business (company, enterprise or firm) is a legally recognized organization designed to provide goods or services, or both, to consumers, businesses and governmental entities. A firm is an organization that employs resources to produce goods and services. Firms may own and operate one or more plants. An industry is a group of firms that produce the same or similar products. Types of firms Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has personal liability of the debts incurred by the business. Partnership: A partnership is a form of business in which two or more people operate for the common goal which is often making profit. In most forms of partnerships, each partner has personal liability of the debts incurred by the business. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Corporation: A corporation is either a limited or unlimited liability entity that has a separate legal personality from its members. A corporation can be organized for-profit or not-for-profit. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. In addition to privately owned corporate models, there are state-owned corporate models. Cooperative: Often referred to as a "co-op", a cooperative is a limited liability entity that can organize for-profit or notfor-profit. A cooperative differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy. Government Institutions: In the present age, in order to expedite the economic progress of the country the government also establishes and conducts business. Public sector enterprises are those enterprises which are owned, controlled and operated by the central or state government or by both. Such enterprises are run mainly to provide service to the public. The performance of public enterprises is discussed in the parliament. These enterprises are generally established as semiautonomous or autonomous bodies. They are engaged in industrial and commercial activities. OBJECTIVES / GOALS OF A FIRM: (a) Profit maximization (b) Maximization of the sales revenue (c) Maximization of firms growth rate (d) Making satisfactory rate of Profit (e) Long run Survival of the firm (f) Entry-prevention and risk-avoidance

Profit Business Objectives: Profit means different things to different people. To an accountant Profit means the excess of revenue over all paid out costs including both manufacturing and overhead expenses. For all practical purpose, profit or business income means profit in accounting sense plus non-allowable expenses. Economists concept of profit is of Pure Profit called economic profit or Just profit. Pure profit is a return over and above opportunity cost, i. e. the income that a businessman might expect from the second best alternatives use of his resources. Sales Revenue Maximisation: The reason behind sales revenue maximisation objectives is the Dichotomy between ownership & management in large business corporations. This Dichotomy gives managers an opportunity to set their goal other than profits maximisation goal, which most-owner businessman pursue. Given the opportunity, managers choose to maximize their own utility function. The most plausible factor in managers utility functions is maximisation of the sales revenue. The factors, which explain the pursuance of this goal by the managers are following:. First: Salary and others earnings of managers are more closely related to sales revenue than to profits Second: Banks and financial corporations look at sales revenue while financing the corporation. Third: Trend in sales revenue is a readily available indicator of the performance of the firm. Maximisation of Firms Growth rate: Managers maximize firms balance growth rate subject to managerial & financial constrains balance growth rate defined as: G = GD GC Where GD = Growth rate of demand of firms product & GC= growth rate of capital supply of capital to the firm. In simple words, A firm growth rate is balanced when demand for its product & supply of capital to the firm increase at the same time. Long run survival & market share: According to some economist, the primary goal of the firm is long run survival. Some other economists have suggested that attainment & retention of constant market share is an additional objective of the firms. the firm may seek to maximize their profit in the long run through it is not certain. Entry-prevention and risk-avoidance, yet other alternative objectives of the firms suggested by some economists is to prevent entry-prevention can be: 1. Profit maximisation in the long run 2. Securing a constant market share 3. Avoidance of risk caused by the unpredictable behavior of the new firms Entry-prevention and risk-avoidance : Micro economist has a vital role to play in running of any business. Micro economists are concern with all the operational problems, which arise with in the business organization and fall in with in the preview and control of the management. Some basic internal issues with which micro-economist are concerns: i. Choice of business and nature of product i.e. what to produce ii. Choice of size of the firm i. e how much to produce iii. Choice of technology i.e. choosing the factor-combination iv. Choose of price i.e. how to price the commodity v. How to promote sales vi. How to face price competition vii. How to decide on new investments viii. How to manage profit and capital ix. How to manage inventory i.e. stock to both finished & raw material

DECISION MAKING: Decision making can be regarded as the cognitive process resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice. Effective and successful decisions make profit to the company and unsuccessful ones make losses. Therefore, corporate decision making process is the most critical process in any organization. In the decision making process, we choose one course of action from a few possible alternatives. In the process of decision making, we may use many tools, techniques, and perceptions. TYPES OF DECISIONS: Programmed Decisions: Programmed decisions are routine and repetitive, and the organization typically develops specific ways to handle them. A programmed decision might involve determining how products will be arranged on the shelves of a supermarket. For this kind of routine, repetitive problem, standard arrangement decisions are typically made according to established management guidelines. Non programmed decisions: Non programmed decisions are typically one shot decisions that are usually less structured than programmed decision. STEPS OF DECISION MAKING PROCESS: Following are the important steps of the decision making process. Each step maybe supported by different tools and techniques.

Step 1: Identification of the purpose of the decision: In this step, the problem is thoroughly analysed. There are a couple of questions one should ask when it comes to identifying the purpose of the decision. What exactly is the problem? Why the problem should be solved? Who are the affected parties of the problem? Does the problem have a deadline or a specific time-line? Step 2: Information gathering: A problem of an organization will have many stakeholders. In addition, there can be dozens of factors involved and affected by the problem. In the process of solving the problem, you will have to gather as much as information related to the factors and stakeholders involved in the problem. For the process of information gathering, tools such as 'Check Sheets' can be effectively used. Step 3: Principles for judging the alternatives: In this step, the baseline criteria for judging the alternatives should be setup. When it comes to defining the criteria, organizational goals as well as the corporate culture should be taken it to consideration. As an example, profit is one of the main concerns in every decision making process. Companies usually do not make decisions that reduce profits, unless it is an exceptional case. Likewise, baseline principles should be identified related to the problem in hand. Step 4: Brainstorm and analyze the different choices: For this step, brainstorming to list down all the ideas is the best option. Before the idea generation step, it is vital to understand the causes of the problem and prioritization of causes. For this, you can make use of Cause-and-Effect diagrams and Pareto Chart tool. Cause-and-Effect diagram helps you to identify all possible causes of the problem and Pareto chart helps you to prioritize and identify the causes with highest affect. Then, you can move on generating all possible solutions (alternatives) for the problem in hand. Step 5: Evaluation of alternatives: Use your judgement principles and decision-making criteria to evaluate each alternative. In this step, experience, and effectiveness of the judgement principles come into play. You need to compare each alternative for their positives and negatives. Step 6: Select the best alternative: Once you go through from Step 1 to Step 5, this step is easy. In addition, the selection of the best alternative is an informed decision since you have already followed a methodology to derive and select the best alternative. Step 7: Execute the decision: Convert your decision into a plan or a sequence of activities. Execute your plan by yourself or with the help of subordinates. Step 8: Evaluate the results: Evaluate the outcome of your decision. See whether there is anything you should learn and then correct in future decision making. This is one of the best practices that will improve your decision-making skills. Conclusion When it comes to making decisions, one should always weigh the positive and negative business consequences and should favour the positive outcomes. This avoids the possible losses to the organization and keeps the company running with a sustained growth. Sometimes, avoiding decision-making seems easier; specially, when you get into a lot of confrontation after making the tough decision. But, making the decisions and accepting its consequences is the only way to stay in control of your corporate life and time.