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AN INTRODUCTION TO MANAGERIAL

ECONOMICS

Objectives

To introduce key economic concepts like scarcity, rationality, equilibrium, time perspective and opportunity cost. To explain the basic difference microeconomics and macroeconomics. between

To help the reader analyze how decisions are made about what, how and for whom to produce. To define managerial economics and demonstrate its importance in managerial decision making. To discuss the scope of managerial economics and its relationship with various other disciplines and functional areas.
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What is Economics?

Discusses how a society tries to solve the human problems of unlimited wants and scarce resources. Scientific study of the choices made by individuals and societies with regard to the alternative uses of scarce resources employed to satisfy wants. Theoretical aspect and an applied science in its practical aspects. Not an exact science; An art as well (Nature of economics) A social science Deals with the society as a whole and human behaviour in particular Studies the production, distribution, and consumption of goods and services. A science in its methodology, and art in its application.

Types of Economic Analysis


Positive and Normative
Positive economics: what is in economic matters

Establishes a cause and effect relationship between variables. Analyzes problems on the basis of facts.

Normative economics: what ought to be in economic matters.


Concerned with questions involving value judgments. Incorporates value judgments about what the economy should be like.

Types of Economic Analysis

Micro and Macro


Microeconomics (micro meaning small): study of the behaviour of small economic units

An individual consumer, a seller/ a producer/ a firm, or a product. Focus on basic theories of supply and demand in individual markets

Macroeconomics (macro meaning large): study of

aggregates.

Industry as a unit, and not the firm. Focus on aggregate demand and aggregate supply, national income, employment, inflation, etc.
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Types of Economic Analysis


contd..

Short Run and Long Run

Short run: Time period not enough for consumers and producers to adjust completely to any new situation.

Some inputs are fixed and others are variable

Long run: Time period long enough for consumers and producers to adjust to any

new situation.

All inputs are variable Decisions to adjust capacity, to introduce a larger plant or continue with the existing one.

Types of Economic Analysis

Partial and General Equilibrium

Partial equilibrium analysis: Related to micro analysis


Studies the outcome of any policy action in a single market only. Equilibrium of one firm or few firms and not necessarily the industry or economy.

General equilibrium: explains economic phenomena in an economy as a whole.

State in which all the industries in an economy are in equilibrium. State of full employment
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Managerial Economics

Application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively

Study of allocation of the limited resources available to a firm or other unit of management among the various possible activities of that unit

Applies economic theory and methods to business and administrative decision-making

Application of economic principles and methodologies to the decision-making process within the firm or organization
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Managerial Economics

Micro as well as Macro

Applied microeconomics: demand analysis, cost and production analysis, pricing and output decisions Macroeconomic: national income, inflation and stages of recession and expansion Prescriptive: States what firms should do in order to reach certain objectives. Decides on whether or not the probable outcome of a managerial decision is desirable. Decisions taken by any firm would relate to the equilibrium of that particular firm. Deals with partial equilibrium analysis

Normative Bias

Decisions Resulting in Partial Equilibrium

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Managerial Economics and Functions of Management

All functional areas have to find the most efficient way of allocating scarce organizational resources Managerial economics:

Facilitates the process of evaluating relationships between functional areas Helps in making rational decisions across managerial functions.

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Managerial Economics and Functions of Management

Financial Management

From where to collect resources


Equity Debt

How to allocate resources How much profit to be retained/distributed Recruitment Wage and Salary Training and development Retirement

Human Resource Management


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Managerial Economics and Functions of Management

Marketing Management

Which product For whom What price How to sell Which technology Inputs Processing Communication channels Use of information Technology
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Operations Management

Information System Management


Relationship Other Disciplines


Economic Theory
Microeconomics Theory of firm Theory of consumer behaviour (demand) Production and cost theory (supply) Market structure and competition Price theory Macroeconomics National income and output Business cycle Inflation

Numeric and algebraic analysis Optimization Discounting and time value of money techniques Statistical estimation and forecasting Game theory

Quantitative Analysis

Managerial Economics

Solutions to Managerial Decision Making


Quantity and quality of product Price of product Marketing Management Financial Management Human Resource Management Research and Development

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Summary
Economics studies the choices made by individuals and societies in regard to the alternative uses of scarce resources which are employed to satisfy unlimited wants. Microeconomics is the study of the behaviour of individual economic units, such as an individual consumer, a seller, a producer, a firm, or a product. Macroeconomics deals with the study of aggregates, the economy as a whole. Ceteris paribus is a Latin phrase, literally translated as with other things (being) the same.

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Summary
The assumption of rationality means that consumers and firms measure and compare the costs and benefits of a decision before going ahead for that decision. Partial equilibrium analysis studies the outcome of any policy action in a single market only, while general equilibrium analysis seeks to explain economic phenomena in an economy as a whole.

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Summary
Concept of Time value of money tells that Value of money depreciates with time. Managerial economics is a means to finding the most efficient way of allocating scarce organizational resources and reaching stated objectives. It is micro as well as macro in nature; it has a normative and deals with partial equilibrium.

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Summary
The knowledge of managerial economics helps to understand the interrelationships among the various functional units of any firm (namely production, marketing, HR, finance, IT and legal) Decision sciences provide the tools and techniques of analysis used in managerial economics, in particular numerical and algebraic analysis, optimization, statistical estimation and forecasting.

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