MANAGERIAL ECONOMICS

MODULE -1

Introduction
To keep the pace with the change in the nature of business organizations and how business is conducted. To supplement the real life cases To explore the techniques of business To make students understand the various dimensions of business problems and possible solutions.

Nature of Managerial Economics

Coordination An activity or ongoing process A purposive process An art of getting things done by other people Decisions like: what, how for whom to produce?

Scope of Managerial Economics

Resource allocation Inventory and queuing problem Pricing problem Investment problems Demand analysis Cost analysis Pricing theory and policies

Profit analysis with special reference to break- even point Capital budgeting for investment decisions The business firm and objectives Competition Linked with microeconomic theory, macro economic theory , operation research, theory of decision making, statistics, management theory & accounting

Managerial Economists in Decision making

Defining the problem Determining the objective Exploring the alternatives Predicting the consequences Making choice Performing sensitivity analysis

Decision Making process

Micro & Macro Analysis Partial and General Equilibrium Analysis Static, Comparative Static and Dynamic Analysis --allowing no change at a point of time (static) -- allowing once for all change at a point of time (comparative static) --allowing successive changes over a period of time (dynamic) Positive and Normative analysis

MODULE -2
FUNDAMENTAL PRINCIPLES OF MANAGERIAL ECONOMICS

Opportunity Cost (Opportunity Lost) The next best alternative Costs of sacrificed alternatives Manager takes a decision by choosing one course of action, sacrificing the other alternatives Holding Rs 1000 in hand

Production possibility curve & increasing marginal opportunity cost

Incremental Principle

The incremental principle is used to measure the profit potential of a project. According to this theory, a project is sound if it increases total profit more than total cost. --To have a proper estimation of profit potential by application of the incremental principle, several guidelines should be maintained: --Incidental Effects: Any kind of project taken by a company remains related to the other activities of the firm. Because of this, the particular project influences all the other activities carried out, either negatively or positively. It can increase the profits for the firm or it may cause losses. These incidental effects must be considered. Sunk Costs: These costs should not be considered. Sunk costs represent an expenditure done by the firm in the past. These expenditures are not related with any particular project. These costs denote all those expenditures that are done for the preliminary work related to the project, unrecoverable in any case.

Time Perspective

All business decision are taken with a certain time perspective. The time perspective refers to the duration of time period extending from the relevant past* and foreseeable future taken in view while taking a business decision. period of past experience and trends which are relevant for business decisions with long run implications. All business decisions do not have the same time perspective. Eg: Manufacturing of Crackers Eg: Management Institute.

Discounting & Equimarginal Principles

When the same product or service is being produced in two or more units of production, in order to get the maximum total output, resources should be allocated among the units of production in such a way that the marginal productivity of each resource is the same in each unit of production. This example may also be a little clearer example of what we mean by "efficient allocation of resources." In the example, we have a tiny economy, consisting of one farmer and two plots of land. When the marginal productivities on the two plots are equal, this tiny economy has an "efficient allocation of resources." Of course, real economies are more complex, but the principles governing the efficient allocation of resources are the same. This rule has a name: it is the Equimarginal Principle. The idea is to make two things equal "at the margin" -- in this case, to make the marginal productivity of labor equal on the two fields. As we will see, it has many applications in economics. In more complicated cases, we will have to generalize the rule carefully. In this example, for instance, we are allocating resources between two fields that produce the same output. When the different areas of production are producing different kinds of goods and services, it will be more complicated. But a version of the Equimarginal Principle will still apply.

Discounting principle
A present gain is valued more than a future gain. Thus, in investment decision making, discounting of future value with the present one is very essential. The following formula is useful in this regard: V= A (1 + i) Where , V = present value, A = annuity or returns expected during a year, i = current rate of interest. To illustrate the formula, suppose A = 110 and i = 10% or 1/10, we can ascertain the present value Rs. 110 one year after as: V = 110 = 110 = 100 1 + 0.1 1.1 In business decision making process, thus, the discounting principle may be stated as: If a decision affects costs and revenues at future dates, it is necessary to discount those costs and revenues to present values before a valid comparison o alternatives is possible