NATURE OF MANAGERIAL ECONOMICS

Managerial economics is concerned with the business firm and the economic
problems that every business management need to solve. It is used in
microeconomic condition as well as macro economic condition. The decision of
the firm which are made almost always within the broad framework of economic
environment within which the firm operates is known as macroeconomics
analysis and deals with problems of an individual firm , industry etc. In the case
of managerial economics ,microeconomics helps in studying what is going on
within the firm. How best to use the available scarce resource between various
activities of the firm. How best to use the available scarce resources between
various activities of the firm, how to be technically as well as economically
efficient,etc.

THE SCOPE OF MANAGERIAL

ECONOMICS
The area of business issues to which economic theories can be applied may be
broadly divided into two categories: (a) operational or internal issues, and (b)
environment or external issues.

Microeconomics applied to operational issues:-

Operational problems are of internal nature. They include all those problems
which arise with in the organisation. some of the basic internal issues are:-

1. Choice of business and nature of product, i.e., what to produce.

2. Choice of the size of the firm, i.e., how much to produce.

3. Choice of technology

4. Choice of price, i.e., how to price the commodity

5. How to promote sales

6. How to face price competition.

7. How to decide the new investments.

8. How to manage profit and capital.

9. How to manage inventory, i.e. , stock of both finished goods and raw
materials

The microeconomic theories which deals with most of these questions are
following:-
Theory of demand- it explains the consumers behaviour. It answer the
questions: buying decisions of consumers, how do they decide on the quantity of
a commodity to be purchased? when do they stop consuming a commodity? How
do the consumer behave when price of the commodity,their income,tastes and
fashions ,etc, change?

Theory of production and production decisions-

Production theory also called “Theory of Firm ” explains the relationship

between input and output . It also explains under the conditions cost increase or
decrease ;how total output increases when units of one factor (input) are
increased keeping other factors constant or when all factors are simultaneously
increased ;how can output be maximized from a given quantity of resources ;

and how can optimum size of output be determined ? Production theory thus
helps in determining the size of the firm ,size of the output and the amount of
capital and labour to be employed .

Analysis of market-structure and pricing theory

Price theory explains how prices are determined under different market
conditions; when price discrimination is desirable ,feasible and profitable ;to
what extent advertising can be helpful in expanding sales in a competitive
market .Thus price theory can be helpful in determining the price of the firm
.Price and production theories together in fact help in determining the optimum
size of the firm.

Profit analysis and profit management

Profit making is the most common objective of all business undertakings .But
making a satisfactory profit is not always guaranteed because a firm has to carry
out its activities under conditions of uncertainty with regard to i)demand for the
product ii)input increases in factor market iii)nature and degree of competition in
product market iv)price behaviour under changing condition in product market
etc.. Therefore an element of risk is always there even if the most efficient
technique are used for predicting future and even if business activities are
meticulously planned .The firm are therefore supposed to safeguard their
interest and avert as far as possible the possibilities of risk or try to minimize it.
Profit theory guides firm in the measurement and management of profit in
making allowances for the risk premium, in calculating the pure return of capital
and pure profit and also future profit planning.

Theory of capital and investment decisions

Capital like other inputs is a scarce and expensive factor .capital is a foundation
of business. the major issues related to business are i)choice investment project
ii) assessing the efficiency of capital ,and iii)most efficient allocation of capital
.Knowledge of capital theory can contribute a great deal in investment decision
making ,choice of projects, maintaining capital intact ,capital budgeting, etc.
MACROECONOMICs APPLIED TO BUSINESS ENVIRONMENT:

MACROECONOMIC ISSUES

1) Issues related to macro variables:

These are the issues that are related to trends in macro variables, e.g., the
general trend in the economic activities of the economic .