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Chapter- 1

Nature and Scope of


Managerial Economics

À Meaning of Managerial Economics


À Nature of Managerial Economics
À Economics and Managerial Decision making
À Subject matter of Managerial Economics
À Scope of Managerial Economics

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Understanding
Economic
Environment
Understanding Understanding
Macro Variables Consumer
Behavior

Understanding
Profit and
Business Understanding
Production
Break-even Success

Understanding
Investment Understanding
Decisions Cost of
Understanding Operation
Competition

Factors affecting Business Success


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An Introduction to Economic
Analysis
À Economic Analysis evolves from basic
propositions about:
1. How individual economic units behave,
struggle with the problem of Scarcity ?
2. How they react to an observed change ?
À The Reality:
1. Resources available to produce goods
and services are limited.

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2.Availability of goods and services are
scarce or limited in supply.
3. Wants of economic units remain unlimited.

À Two basic Ingredients of Economic


Phenomena:
1. Scarcity
2. Choice
À This choice involves an opportunity cost-
next best alternative choice foregone.

Meaning of Managerial
Economics
À Managerial Economics is the Application of
Economic Theory and Methodology to
Business.
À Managerial Economics is the use of
Economic Analysis to make Business
Decisions involving the best use of an
organization's scarce resources.
À Managerial Economics serves as a bridge
between Economic Theory and Business
Decision-making.
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À Managerial Economics is a Tool Box of
Analysis and a Technique of Thinking which
can be helpful in Conceptualizing the
Problems faced by the management of an
Organization.

À Managerial Economics is the Integration of


Economic Theory and Business Practice for
the purpose of Facilitating Decision-making
and Forward Planning by Management.

Business Decisions: Classification

À Financial Decisions:
Relate to costing, budgeting, accounting,
auditing, tax-planning, dividend
distribution, etc.
À Production Decisions:
Relate to input-output, inventory control,
choice of technology, plant location and
layout, production scheduling, etc.

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À Personnel Decisions:
Relate to recruitment, selection, training,
development, placement, promotion,
transfer, retirement, retrenchment, etc.
À Marketing Decisions:
Relate to sales volume, sales promotion,
market research, packaging, advertising,
after sales service, new product
positioning, etc.
À Miscellaneous Decisions:
Relate to information systems, data
processing, public relations, etc.
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À Business firms should reach the optimal


decision - promoting the goal of the
business firm.
Requirement:
À Formulate Business Problem Scientifically.
À Develop rational Methodology.
À Use appropriate Tools.
Managerial Economics meets these needs of
the business firm.
A bridge between economic theory and
business decision-making.
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Nature of Managerial Economics
À Concerned with Decision-making.
À Deals with identification of economic
choices and allocation of scarce resources.
À Essentially applied microeconomic in
nature.
À Goal-oriented: Deals with how decisions
should be made by business firms to
achieve organizational goals.
À Perspective: Concerned with analytical
tools useful in improving decision-making.
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À Conceptual: Aims to analyze business


problems on the basis of established
concepts.
À Belongs to normative economics, besides
being positive or descriptive. Positive
economics describes what is – observed
economic phenomenon. Normative
economics prescribes what ought to be-
distinguishes the ideal from the actual.
À Utilizes some theories of macroeconomics.
À Problem solving in nature.

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Economics and Managerial
Decision-making
Prime Function of Management

Decision-Making Forward Planning

À Decision making is the process of selecting


the best course of action out of the
alternatives.
À Forward planning is the Planning for the
future.
À Understanding Managerial Economics helps
in both Decision making and Forward
Planning
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Economic Theory and Decision Problems


Methodology in Business

Managerial Economics
(Application of Economic Theory
And Methodology to solving Business Problem)

Optimal Solutions to
Business Problems

Role of ME in Business Decision-making


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Scope of Managerial Economics
À Used to explain and understand all most all
major business problems.
À Plays a vital role in managerial-decision
making.
À Prescribes specific solutions to the problems
of the firm.
In Specific, it helps in:
À Analyzing Product Demand.
À Forecasting Demand

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À Analyzing Production Behavior


À Planning of Production Schedule
À Deciding the input combination
À Estimation of cost of Product
À Analysis of cost of Product
À Achieving Economies of Scale
À Determination of price of product
À Market structure and Competition
À Profit estimation
À Break-even Analysis
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Subject matter of Managerial Economics
À Subjects directly or indirectly relate to
economic variables which facilitates in
Decision making.

Demand and Supply Analysis


À Determinants of Demand
À Law of Demand
À Elasticity of Demand
À Forecasting of Demand
À Supply Determinants and Supply Elasticity

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Production Behavior
À Short-Run Production Analysis
À Long-Run Production Analysis
À Economies of Scale
Analysis of Cost
À Determinants of Cost
À Cost Concepts & Relevance
À SR Cost Analysis
À LR Cost Analysis

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Pricing and output Decisions
À Market Structure and Competition
À Perfect Competition
À Monopoly
À Monopolistic Competition
À Oligopoly
Profit Analysis
À Break-even Analysis
À Profit Maximizing conditions
Pricing Practices
À Various Pricing techniques
Macroeconomic variables in
Decision Making
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Fundamental Concepts in
Managerial Economics
À Concept of Opportunity Cost:
Represents the benefits or revenue
foregone by pursuing one course of action
rather than another.
It is the cost of Sacrificing the alternatives
to that Decision.
Plays a critical role so far managerial
decision making is concerned.

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À Marginal Analysis:
Is concerned with finding out the change in
the total arising because of one additional
unit.
À Incremental Analysis:
A course of action should be pursued up to
the point where its incremental benefits
equal its incremental costs. A decision is
obviously a profitable one if:
It increases revenue more than costs.
It decreases some costs more than it
increases others.
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It increases some revenues more than it


decreases others.
It reduces costs more than revenue.
(Incremental Cost may be defined as the
change in total cost resulting from a
Decision).
(Incremental Revenue may be defined as
the change in total revenue resulting from a
Decision).
À Time Value of Money:
A $ received today is more valuable than a
$ that will be received later.
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The Discounting and Compounding Principle
(DCP) states that when a decision involves
money receipts or payments over a period
of time, all the money transactions must be
valued at a common period to be
meaningful for decision analysis.
À Money has time value for three reasons:
À Earning power
À Changing Prices
À Uncertainty
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À Time Perspective:
It is usual in economics to divide time
period in to Short-run and Long-run.
SR is a period of time when some factor-
inputs are fixed while others are variable.
Hence, supply is relatively inelastic.
LR is a period of time when all factor-
inputs are variable. Hence, supply can be
adjusted to the market conditions.
A decision should take into account both
the SR
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A decision should take into account both
the SR and LR effects on revenues and
costs so as to maintain a right balance
between long-run and short-run
perspectives.

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