MANAGERIAL ECONOMICS

What is Economics?

What is Economics?
Study of how societies choose to use scarce productive resources that have alternative uses, to produce commodities of various kinds to achieve their goals.

What is the Objective of Economists in a Country?

Scarce Resources
1) Men 2) Money 3) Materials 4) Methods 5) Machinery 1) Land 2) Water 3) Time 4) Natural Resources, etc.
Why goods are scarce? What is Opportunity Cost?

Economists to maximize the Welfare or Finance?

Economists to maximize the Person Welfare or Society welfare

Economics is an ART or SCIENCE?

Why is one country richer than another?

Govt. Planners/Market forces decide how to allocate scarce resources. Eg. Aviation, courier, Environmental management. Market economy works as if an invisible hand guides the actions of individuals to combine for the common good. Adam Smith Economics are soft scientific theories.

Economics
1) Macroeconomics 2) Microeconomics. Macroeconomics: Study the performance of the economy as a whole. Microeconomics: Study with the behavior of individual entities such as markets, firms, and house holds. 3 problems of Economic Organization: What, how and for whom? Answer: Command and Market.

Objective of Business Firm

Main Objective of any Organization

Business is about meeting social needs. Making money is the byproduct of that purpose Peter Senge. (or) Stakeholders welfare maximization by satisfying their needs and wants

Alternative Objectives
Maximizing Profit Maximization of Sales revenue Maximization of firms growth rate Maximization of Managers utility function Making a satisfactory rate of profit Reasonable Profit Long-run survival of the firm Entry-prevention and risk-avoidance Maximizing value of the firm

What is Profit?

Profit Theories
Walkers Theory Reward or Rent for Exceptional abilities that an entrepreneur may possess Clarks Dynamic Theory Elusive sum which entrepreneurs grasp but cannot hold

Profit Theories
Hawleys Risk Theory Reward for the Risk taken
Knights Theory Reward for the uncertainty Schumpeters Innovation Theory Profit appears and disappears as economy develop 21st Century Concept of Profit: Profit is the reward that the society provides to an organization for the service it provides.

Business Manager Objective

Business Manager Objective

Stake Holders Welfare Maximization Or Share Holders Welfare Maximization

Stake Holders
External Customers Internal Customers Suppliers & Dealers Government Departments Environment Society in and around World Society Share Holders / Promoters / Owners

How Economics affects your life?

Managerial Economics provides

A Road Map

Guides us to destination
Organized and orderly method of thinking out a particular business problem

Opportunity Cost
Opportunity cost is the benefit forgone from the next best alternative that is not selected.

Production Possibility Curve Production Possibility Frontier

Production possibilities curve is a graph that shows the different combinations of the quantities of two goods that can be produced (or consumed) in an economy, subject to limited availability of resources.

Profit Measurement
Accounting Profit Economic Profit Total Revenue Explicit cost Implicit cost (Depreciation) Economic Profit = Total revenue Total Economic Cost (Explicit + Implicit costs)

Marginal Analysis
Marginal Utility Marginal Cost Marginal Revenue

Caselet
Kaushik a regular customer of a sweet stall, consumes sweets of a same variety daily from the same sweet stall. Even though the sweets are consistently of high quality and taste, satisfaction level of Kaushik was high initially and decreased day by day. Why?

Law of Diminishing Marginal Utility

The quantity consumed of a commodity goes on increasing the utility derived from each successive unit goes on diminishing, consumption of all other commodities remaining the same

Law of equi-marginal utility

A utility maximizing consumer distributes his consumption expenditure between various goods and services he/she consumes in such a way that the marginal utility derived from each unit of expenditure on various goods and service is the same

Decision Making

Decision Analysis
Identify the problem 50% of problem is over. How to Overcome? Various options. Certainty / Uncertainty / Risk

Various options
Certainty: Outcome of a decision is precisely known in advance Risk: Know the possible outcomes and its probability Uncertainty: Doesnt know about the possible outcomes.

Decision Analysis Contd

How to arrive the probabilities?

1) Previous exp. or objective 2) Statistical or subjective.

Steps involved in Decision making

1) 2) 3) 4) 5) 6) 7) Problem identification Environmental factors Available options Probabilities Set of consequences (risk neutral/averse/prefer) Making a choice Strategy for unexpected situations.

Managerial Decision Areas Scope of Managerial Economics

Managerial Decision Areas (Micro Economics)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Investible Funds Business Area Product Size of the firm Location Input combination (Factor Combination) & Technology Optimum output Facing Competition Price of the Product Sales Promotion Managing Inventory Managing Profit & Capital Expansion

Macro Economics ( External Environmental factors in Decision Making

1. Type of Economic System 2. General Trends in national Income, Employment, Prices, Saving and investment 3. Financial Institutions 4. Magnitude of and trends in foreign trade 5. Trend in labour supply & Capital Market 6. Government economic policies 7. Social factors 8. Socio-Economic Organizations ( Trade Union, Cartel) 9. Political Environment 10. Globalization

Sources of Business Risk

Market fluctuations Industry fluctuations Competition Technological change Taste fluctuations Public policy Exchange rate fluctuations. Natural Environment

Labour / Workforce Productivity Cost fluctuations Inventory Management Energy Capital Time Accidents / Fire