UNIT I INTRODUCTION

N.Kirubasankar, MBA (ACS) Lecturer, UCET

INTRODUCTION & DEFINITION

Economics is a study on how human beings allocate scarce resources to produce various commodities & how those commodities are distributed for conception among the people in the society. The science of the production and distribution of wealth.

DEFINITION
Managerial economics Managerial economics is the application of economic principles and methodologies to the decision-making process within the firm or organization. Managerial economics applies economic theory and methods to business and administrative decision-making.

The subject is broadly divided into two things a.)Micro economics. b.)Macro economics. Microeconomics It deals with individual agents such as household and Business activities in the market. Macroeconomics It studies the economic system as a whole National income, agricultural o/p & Total employment

Managerial economics is applied micro economics It focuses on topics that are greatest importance to managers which includes demand, production, cost, pricing, market structure and government regulation. It helps the managers in two ways. For a given economic environment managerial economics evaluates whether resources are being allocated within a firm. Helps manager to respond to various economic signals.

RELATION WITH OTHER

DISCIPLINES
Introduction The simplest way to clarify the scope of a field of study is to discuss its relation to other subjects. The have a close connection with the following. Economics Theory of decision making Operations research Statistics, accounting Computer science

MANAGERIAL ECONOMICS & ECONOMICS

The main source of concepts and analytical tools for managerial economics is micro- economics Micro economic concepts are as follows. Elasticity of demand. Marginal cost. Short & Long run cost. Pricing & Output. Competition. Capital Budgeting. Interest rates & Calculations are the great significance to managerial economics

TWO MAIN CONTRIBUTIONS OF ECONOMICS & MANAGERIAL ECONOMICS

To help in understanding the market conditions and the general economic environment within which the firm operates. To provide a philosophy for understanding & analyzing resource allocation problems. Business efficiency is the result of technical and economic efficiency. Technical carried out to the best of technological specifications. Economic efficiency requires that the firm maximized its goal(of profit, sales etc) by producing maximum output at minimum cost.

MANAGERIAL ECONOMICS & THEORY OF DECISION MAKING

Main assumption is single goal maximization. They inquire into an analysis of motivation, rewards an aspiration level. It contribute to the improvement of practice by focusing on new problems and suggesting new lines of attack. It is of practical in nature and application oriented than pure economics.

MANAGERIAL ECONOMICS & OPERATIONS RESEARCH

Both are concerned with taking effective decisions. Operations research is concerned with model building. Managerial economics applies these models of decision making. Operations research through its scientific model helps managerial economics to take effective decisions in the field of inventory control, product development, quality control, demand management, forecasting, plant layout.

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The following are some of the application tools of operations research that helps managerial economists in decision making. Linear programming. Dynamic programming. Input-output analysis. Queuing Theory. Theory of Games.

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MANAGERIAL ECONOMICS & STATISTICS

Statistics is important in providing the individual firm with measures of the appropriate functional relationship involved in decision making. Studies are made of Theory of Probability and they are important to managerial economics. Managers do not have overall exact information about the variables which affect decisions, they must deal with uncertainty of future events. Linear programming is an important statistical technique for treating problems by ME to find the best solution or the best alternative. It may personally study or reports, figures, trends and other data necessary in many decision programmes.

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MANAGERIAL ECONOMICS & ACCOUNTING

It is also related to accounting. Accounting is concerned with recording of the financial operations of a business firm. It is done through the primary sources of data required by managerial economists for the decision making purpose. For eg: P/L A/C statement of a firm indicates how well the firm is running successfully. Whether it should try to improve or close down the business operations.

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MANAGERIAL ECONOMICS & COMPUTER SCIENCE

Computers is the main component of todays management information system, used to gather, organize, distribute, store and retrieve information from business for managerial analysis, decision making and control. The huge economic data is processed by computers to get proper output to take effective decisions. Supply & Demand predictions, inventory and stock control, data maintenance are some of the areas where computers are used.

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MANAGERIAL ECONOMICS & SOCIOLOGY

Both psychology & sociology provide the basis of behavioral theory of firm. The study motivates an individual to work and the study of group behavior is essential for any decision making. For eg: the decision to install a compute based information system should be taken after studying the reaction of employees.

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FIRMS

What is a firm? A firm is a unit engaged in production of goods & services. The term firm includes all those enterprises which are related with the production not only of goods but also of services. A firm may be an individual proprietor or partnership or joint stock company.
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DEFINE THE WORD FIRM

Firm is a unit that produces a good or services for sale Edwin Mansfield. In order to earn profits, the firm is an entity that organizes factors of production to produce goods & services that will meet the demands of individual consumers and other firms HC Peterspm and W.C. Lewis.

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TYPES OF FIRMS
Firms or businesses may be organized in various types, depending on their size, nature, legal framework of the economy and need for resources. Based on this concept, firms may be divided into three broad categories. Private sector(Proprietorship, Partnership, Company & Cooperative) Public sector (Company, Corporation & Department) Joint sector.

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Private sector When ownership of the firm is in the hands of individuals, whether independently, or as a small group, or in large number, without any investment from the government, then the type of a firm is called private sector. Sole proprietorship Sole proprietorship may be single owner or proprietary firm in which an individual invests his own (or borrowed) capital, uses his own skills in management.

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Partnership A relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all Joint stock company The most important type of business organization today is the joint stock company, commonly called company. A joint stock company is established under Companies act 1956..

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The details of functions and scope of the company are governed by Memorandum of Association signed among the members. The memorandum contains 1.The name of the company 2.The location of the head office, its aim & objectives. 3.Amount of shares & Capital. Articles of association contains 1.Rules & regulations of the company drafted.

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joint stock company is a legal entity and its existence is independent of its members. It has a name, a seal and an authorized signatory. The have the right to own, buy, sell and transfer property A company has basically two forms namely, Private Limited and Public limited. Private limited company
Maximum no of shr.holders in such a company is limited to fifty. The shares of the company are transferable only among the members. It has to operate under certain restrictions, it can neither issue a prospectus, nor can it raise capital by selling its shares to outside public other than the members.

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Public Limited company The joint stock company may take the form of a public limited company, in which there is no limit on the maximum number of members though the minimum number of members is seven. They have to submit a certain statements and balance sheet to the registrar of joint stock company on an annual basis. It can invite the public to buy shares bys issuing a prospectus

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Cooperative A cooperative is a non profit, nonpolitical, non religious, voluntary organization, formed with an economic objective. The main principles of cooperation are It is based on mutual help & Self reliance. Dealings are confined to members only. Its objective is not earning profits but, to encourage mutuality and cooperation.

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PUBLIC SECTOR
Public sector is that segment of economy where government is the investor and the owner of a business. Corporate (or) Company Just like private sector when government invests in production activities and enters the market, such firms are called as Public Sector Units(PSUs) or Public Sector Enterprise(PSEs).

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These PSU have to operate on the same ground as any other joint stock company, with the single exception that there are no shareholders, as the government owns the entire or controlling amount of invested capital. Employment generation, development of product where private sector does not want to enter. In India SAIL, ONGC, NTPC, GAIL, BSNL are some examples of PSUs.

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Corporation or Board Another structure of organization is in the form of a corporation or board. The corporation or the board normally controls some of the economics activities, especially where the government feels that government intervention is necessary for equal distribution of economic resources. India typical examples are Khadi & village Industries Corporation(KVIC), coir board, Food Corporation of India and Railway board.
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Department A department is run for a specific purpose related to social utility, such as education, health, civil administration, etc. These departments normally function under the directives of relevant ministries, at the appropriate level. For eg. In India, police ,excise and education are the responsibility of state governments. Telecommunication, post &telegraph, customs etc are under the central govt.
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Joint sector The joint sector is a form of partnership between the public sector and private sector to establish new enterprises. Day-to-Management will normally be in the hands of the private sector partners, control and supervision will be exercised by a board of directors on which governments, special financial institutions such as IDBI, IFCI and other institutions like LIC and UTI and state financial and Industrial development corporations.
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Private sector consists of both Indian and foreign investing Public and business house. However, joint sector can succeed only when there is a complete understanding, faith and co-operation between private and public sector partners.

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NATURE OF THE FIRM

Profit. Quality. Services. Customer satisfaction.

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OBJECTIVES OF THE FIRM

Profit Maximization Firms value maximization Sales maximization (subjected to some predetermined profit) Size maximization Long run survival Management utility maximization(self interest behviour of managers) Satisfying (want to survive in market) Other non-profit (Objectives) Govt org to serve the people. 32

MANAGERIAL DECISIONS
Decision A decision may be defined as a choice that can be made from available alternatives. Characteristics of Decision Making Goal-oriented process It is a continuous process because a manager is required to tae decisions continuously for different activities.
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3. Decision making is considered both an art and a

science. 4. Decision making is the responsibility of managers at different levels of management. 5. Decision making involves deep and careful thinking and hence it is a mental process 6.Decision making can be both positive and negative it may be positive to perform certain activities or negative not to perform certain activities. 7. Decisions are made for further course of action based on the past experience and present conditions.
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IMPORTANCE OF DECISION MAKING

Decision making is an important aspect of planning. Without making decision nothing can be done. For performing various aspects of management functions like planning, organizing, control, etc. Decisions must be made because it helps to set objectives, prepare plans of action, introduce innovations, determine organization structure of the concern and so on.

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PROCESS OF DECISION MAKING

Identifying the problem. Analyzing the problem. Developing alternative solution for the problem. Evaluating the alternatives. Deciding the best course of action. Conversion of decision into action. Control.

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TYPES OF DECISIONS
Major & Supplementary decisions. (Qlty of the product , price of the prdt, developing a new product). (Color, size and packaging and so on.) Organizational & Personal decisions. (Adoption of strategies, framing of objectives etc). (Surrendering earned leave, taking medical leave). Basic & Routine decisions( Long range & commitment and large funds Selection of location, selection of a product line, merger of the business). Vital decisions. (day-to-day activities, repetitive in nature, minor impact on business, middle & lower level of management. Eg Purchase of smaterials)

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Programmed & Non programmed decisions. ( Routine in nature, similar to routine decisions, Procedures play a vital role). (Similar to basic decisions & highly important and unstructured, policies play a key role). Individual & Group decisions.(Decision taken by one person.(Group of persons, Decision taken by Board of Directors and the chief executive in the interest of the organization as a whole. Main drawback of group is that all the members in the group cannot be made responsible for the result of the decision). Policy & Operating decisions. (Top level management , baisc policies and goals of the organization).(Taken to execute the policy decisions. Taken by middle and lower level of managements are related to routine activities of business.
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DECISION ANALYSIS
The most fundamental and important task that a manager faces is to make decisions in an uncertain environment. For eg. A manufacturing manager must decide how much capital to invest in new plant capacity, when future demand for products is uncertain. A marketing manager must decide among a variety of different marketing strategies for a new product, when consumer response to these different marketing strategies is uncertain

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WHAT IS DECISION ANALYSIS(DA)

DA is the art and science of formal decision making. DA is often employed in making business decisions and use specific methods and tools to identify and assess factors, risks and possible outcomes to reach optimal decision in an uncertain situation. Definition DA is a logical and systematic way to address a wide variety of problems involving decision making in an uncertain environment.

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