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Unit 1: The Nature and Scope of Managerial Economics Contents 1.0 Aims and Objectives

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Introduction to Managerial Economics
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  UNIT 1: THE NATURE AND SCOPE OF MANAGERIAL ECONOMICS UNIT 1: THE NATURE AND SCOPE OF MANAGERIAL ECONOMICS ContentsContents1.0 Aims and Objectives 1.0 Aims and Objectives 1.1 Introduction1.1 Introduction1.2. Managerial Economics: What it is All About 1.2. Managerial Economics: What it is All About 1.3 Importance of Managerial Economic for Managers 1.3 Importance of Managerial Economic for Managers 1.4 Scope of Managerial Economic and the Business Environment 1.4 Scope of Managerial Economic and the Business Environment 1.5 Economic Decisions 1.5 Economic Decisions 1.6 Decision Making System and Process1.6 Decision Making System and Process1.7 Let Us Sum Up 1.7 Let Us Sum Up 1.8 Key Words 1.8 Key Words 1.9 Answers to Check Your Progress Exercise1.9 Answers to Check Your Progress Exercise1.10 Model Examination Questions 1.10 Model Examination Questions 1.0 AIMS AND OBJECTIVES 1.0 AIMS AND OBJECTIVES The aim of this unit is to present you an over view of what is all about Managerial EconomicThe aim of this unit is to present you an over view of what is all about Managerial Economicand how Economic models use to make decision and how Economic models use to make decision After studying this unit, students will be able to:After studying this unit, students will be able to: -- define managerial economics and illustrate the typical issues encountered in the field define managerial economics and illustrate the typical issues encountered in the field -- discuss the scope and methodology of managerial economicsdiscuss the scope and methodology of managerial economics -- demonstrate the importance of economic analysis in managerial decision-makingdemonstrate the importance of economic analysis in managerial decision-making -- explain how managerial economics helps managers to make an optimal economicexplain how managerial economics helps managers to make an optimal economicdecision decision -- identify different types of Economic decisions and identify different types of Economic decisions and -- understand decision making system and process. understand decision making system and process. 1  1.11.1INTRODUCTIONINTRODUCTION The business decision-making process has become increasingly complex due to ever growingThe business decision-making process has become increasingly complex due to ever growingcomplexity of the business world. Experiences acquired through traditional training are nocomplexity of the business world. Experiences acquired through traditional training are nolonger sufficient to meet the managerial challenges. Thus making an appropriate businesslonger sufficient to meet the managerial challenges. Thus making an appropriate businessdecision requires a clear understanding of market condition, market fundamentals and thedecision requires a clear understanding of market condition, market fundamentals and the business environment. business environment.As a result, the application of economic concepts, theories, logic and analytical tools in theAs a result, the application of economic concepts, theories, logic and analytical tools in theassessment and prediction of market conditions and businesses environment have proved toassessment and prediction of market conditions and businesses environment have proved to be of great help in business decision making be of great help in business decision makingThis unit discusses the basic concepts of Managerial Economic and it application in decisionThis unit discusses the basic concepts of Managerial Economic and it application in decisionmaking. Moreover the unit examines the nature of economic decisions and decision makingmaking. Moreover the unit examines the nature of economic decisions and decision making process.  process. 1.2 WHAT IS MANAGERIAL ECNOMICS?1.2 WHAT IS MANAGERIAL ECNOMICS? Its name suggests its scope, content, the form and structure of the subject. ManagerialIts name suggests its scope, content, the form and structure of the subject. Managerialeconomics (ME) constitutes economic theories and analytical tools that are widely applied toeconomics (ME) constitutes economic theories and analytical tools that are widely applied to business decision. It is therefore first important to define what the word economics is.  business decision. It is therefore first important to define what the word economics is. Economics is a social science, it studies how nations make decision to allocate their resourcesEconomics is a social science, it studies how nations make decision to allocate their resources between competing needs of society so that economic welfare of the society can be between competing needs of society so that economic welfare of the society can bemaximized. However, choice-making is not so simple as it looks because the economic work maximized. However, choice-making is not so simple as it looks because the economic work is very complex and most economic decisions have to be taken under the conditions of is very complex and most economic decisions have to be taken under the conditions of imperfect knowledge, risk and uncertainly. Thus economists in their endeavor to study theimperfect knowledge, risk and uncertainly. Thus economists in their endeavor to study thecomplex decision making process have developed analytical tools, techniques and economiccomplex decision making process have developed analytical tools, techniques and economictheories with the aid of mathematics and statistics.theories with the aid of mathematics and statistics.2  ME is the integration of economics theory (application of Economics theory) with businessME is the integration of economics theory (application of Economics theory) with business practice for the purpose of facilitating decision making and forward planning by management. practice for the purpose of facilitating decision making and forward planning by management.It uses analytical tools and a set of concepts to provide effective ways of thinking aboutIt uses analytical tools and a set of concepts to provide effective ways of thinking aboutdecision problem. decision problem. Fig 1.1 Fig 1.1 Relationships between Managerial Economics and Related Disciplines Relationshi    ps between Managerial Economics and Related Disciplines 1.3 IMPORTANCE OF MANAGERIAL ECONOMIC FOR MANAGERS 1.3 IMPORTANCE OF MANAGERIAL ECONOMIC FOR MANAGERS The manager is the person who organizes factor of production, introduce new ideas or productThe manager is the person who organizes factor of production, introduce new ideas or productor processes, make the business decisions and is held accountable for success or failure. Sinceor processes, make the business decisions and is held accountable for success or failure. Sincemanagers in all types of enterprise face a common set of problems these tools of ME can bemanagers in all types of enterprise face a common set of problems these tools of ME can beapplied by all managers in profit seeking firms in the public and not for profit sectors. Inapplied by all managers in profit seeking firms in the public and not for profit sectors. In profit seeking firms the decision can be such as in relation to customers including pricing, and profit seeking firms the decision can be such as in relation to customers including pricing, andadvertising; suppliers; competitors or the internal working of the organization. And in theadvertising; suppliers; competitors or the internal working of the organization. And in the public and not-for- profit sectors of the economy the same managerial economics principle is public and not-for- profit sectors of the economy the same managerial economics principle isapplied for example to allocate funds among different programs. Moreover these principlesapplied for example to allocate funds among different programs. Moreover these principlesexist whether a market is local or global. exist whether a market is local or global. The basic function of the managers of a business is to achieve the objective of the firm thus toThe basic function of the managers of a business is to achieve the objective of the firm thus tomaximum profit with the limited resource placed at their disposal, Bearing this function inmaximum profit with the limited resource placed at their disposal, Bearing this function inmind, managerial economics helps managers in two ways.mind, managerial economics helps managers in two ways.3   Economic concepts Ex. Theory of market structure and pricing Decision sciences / toolsEx. optimizationManagerial Economics Management Decision Problem Optimal solution to managerial decision  problem  -- First it provides a framework for evaluating whether resources are being allocatedFirst it provides a framework for evaluating whether resources are being allocatedefficiently with in the firm. It helps to identify the alternative means of achieving theefficiently with in the firm. It helps to identify the alternative means of achieving thegiven objectives, and then to select the alternative that accomplishes the objective ingiven objectives, and then to select the alternative that accomplishes the objective inthe most resource efficient manner, for example to determine if profit could bethe most resource efficient manner, for example to determine if profit could beincreased by substitute labor (variable cost) by technology (fixed cost) increased by substitute labor (variable cost) by technology (fixed cost) -- Second these principles help managers to respond to various economic signals. For Second these principles help managers to respond to various economic signals. For example an increase in prices of the output would be the appropriate signal to increaseexample an increase in prices of the output would be the appropriate signal to increasean output.an output. 1.4 SCOPE OF MANAGERIAL ECOMONICS &THE BUSINESS ENVIRONMRNT 1.4 SCOPE OF MANAGERIAL ECOMONICS &THE BUSINESS ENVIRONMRNT Business Environment has reference to the broad characteristics of the economic system inBusiness Environment has reference to the broad characteristics of the economic system inwhich the business firm operates. It includes the overall economic policies, social factors andwhich the business firm operates. It includes the overall economic policies, social factors and political atmosphere of the nation. Managerial economics, however, concerned with only the political atmosphere of the nation. Managerial economics, however, concerned with only theeconomic environment, and in particular with those economic factors which form the businesseconomic environment, and in particular with those economic factors which form the businessclimate. Such factors may not be described under the major categories as the micro and theclimate. Such factors may not be described under the major categories as the micro and themacroeconomics. Micro Economics focuses on individual economic behavior (individualmacroeconomics. Micro Economics focuses on individual economic behavior (individualhouseholds) and firms and their interaction in the market where resources are costly, e.g., howhouseholds) and firms and their interaction in the market where resources are costly, e.g., howconsumers respond to changes in prices and income, how businesses decide on employmentconsumers respond to changes in prices and income, how businesses decide on employmentand sales. On the other hand, macro economics deals with the aggregate economic variablesand sales. On the other hand, macro economics deals with the aggregate economic variablesor the economic system as a whole. It addresses question like the effect of changes inor the economic system as a whole. It addresses question like the effect of changes ininvestment, government spending, employment, exchange rates, and inflation, unemployment,investment, government spending, employment, exchange rates, and inflation, unemployment,import and export policies. It shows how fiscal and monetary policies can keep the aggregateimport and export policies. It shows how fiscal and monetary policies can keep the aggregatesystem working well.system working well.Many macro economic theories are based on micro economic principles and concepts.Many macro economic theories are based on micro economic principles and concepts.Similarly micro economic behavior of many variables can be meaningfully explainedSimilarly micro economic behavior of many variables can be meaningfully explainedonly with reference to macro economics environment. The scope of managerialonly with reference to macro economics environment. The scope of managerialeconomics to managerial issueseconomics to managerial issues   is more limited to microeconomics. It should beis more limited to microeconomics. It should bethought with respect to micro economics focusing on those topics like demand,thought with respect to micro economics focusing on those topics like demand, production, cost, pricing, and market structure. production, cost, pricing, and market structure.4  1.5 ECONOMIC DECISIONS 1.5 ECONOMIC DECISIONS Making an optimal economic decision is a very difficult task for most managers. There isMaking an optimal economic decision is a very difficult task for most managers. There isalways a problem of choice when two or more alternative courses of action are variable. Thealways a problem of choice when two or more alternative courses of action are variable. Theact of choice signifying solution of an economic problem is economic decision making. Sinceact of choice signifying solution of an economic problem is economic decision making. Sinceeconomic theories state general relationship between two or more economic events, theyeconomic theories state general relationship between two or more economic events, they provide consistency in analysis, which helps in arriving at right conclusions. However, provide consistency in analysis, which helps in arriving at right conclusions. However,economic decision will be less risky to the extent the probability of the occurrence of theeconomic decision will be less risky to the extent the probability of the occurrence of thefuture events is correctly estimated. future events is correctly estimated. Economic decisions or business decisions are numerous in number and various in form mostEconomic decisions or business decisions are numerous in number and various in form mostof these decision have got an economic content. Managers of profit –seeking firms are facedof these decision have got an economic content. Managers of profit –seeking firms are facedwith a wide range of important decisions in the areas of pricing, product choice, cost control,with a wide range of important decisions in the areas of pricing, product choice, cost control,advertising, capital investments, and dividend policy, to name a few. Managers in the not-for-advertising, capital investments, and dividend policy, to name a few. Managers in the not-for- profit and the public sectors are faced with a similarly wide range of decisions. For example, profit and the public sectors are faced with a similarly wide range of decisions. For example,how to allocate funds among such competing needs like travel expenses, phone services,how to allocate funds among such competing needs like travel expenses, phone services,secretarial support, and the like. Longer- range decisions may focus on new facilities, newsecretarial support, and the like. Longer- range decisions may focus on new facilities, new programs, the purchase or lease of office equipments, and the decision to establish an programs, the purchase or lease of office equipments, and the decision to establish anexecutive training center. executive training center. Thus the description analysis and evaluation of these decisions are not possible without theThus the description analysis and evaluation of these decisions are not possible without theuses of concepts and tools. Some of the business decisions, which have economic content, areuses of concepts and tools. Some of the business decisions, which have economic content, arediscuss as followdiscuss as follow1.1.Profit decision: as we see later on maximizing of profit is the objective of the firm. ProfitProfit decision: as we see later on maximizing of profit is the objective of the firm. Profitdecision may include decisions about level of profit, rate of profit reinvestment. decision may include decisions about level of profit, rate of profit reinvestment. 2.2.Demand decision: the management of the firm has to estimate current and future demandsDemand decision: the management of the firm has to estimate current and future demandsfor the output produced by the firm. It helps to allocate existing resources efficiently. for the output produced by the firm. It helps to allocate existing resources efficiently. 3.3.Production decision: demand decision followed by production decision. The decision mayProduction decision: demand decision followed by production decision. The decision mayinclude what, how, when and to whom produce. Moreover the decision goes to whatinclude what, how, when and to whom produce. Moreover the decision goes to whatshould be the scale of production? What should be the product mix?should be the scale of production? What should be the product mix?4.4. Price and output decisions: such decisions focus on in what price and in what quantity arePrice and output decisions: such decisions focus on in what price and in what quantity arethe products sold in the commodity market in order to maximize the firm’s profit?the products sold in the commodity market in order to maximize the firm’s profit?5
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