Managerial Economics (B.Com) module 1 | Introduction to managerial economics
Introduction
Definition of Economics
a) Wealth Definition
b) Welfare Definition
c) Scarcity Definition
d) Growth Definition
a) Wealth Definition
According to Adam’s Smith, “Economics is the study of wealth, how wealth is produced and distributed.”
b) Welfare Definition
According to Alfred Marshall, “Economics is the study of mankind in the ordinary business of life.”
c) Scarcity Definition
According to Lionel Robbins, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
d) Growth Definition
Economics is the study of how people and society end up choosing with or without the use of money to employ scarce productive resources that could have alternate uses to produce various commodities and distribute them for consumption, now or in the future, among various persons or groups in the society.
Managerial Economics
According to Spencer and Sieglman, “Managerial economics is the integration of economic theory with business management for the purpose of facilitating decision making and forward planning by management.”
Objectives of managerial economics
1. To integrate economic theory with business practices.
2. To minimize risk and uncertainty.
3. To help in profit maximization.
4. To helps in demand and sales forecasting.
5. To make all round development of a firm.
6. To apply economic concept to solve business problems.
Nature/Characteristics of Managerial economics
1. It is micro economic in nature.
2. It also relies on macro-economics.
3. It is pragmatic.
4. It is normative.
5. It is management oriented.
6. It is multidisciplinary.
Importance of managerial economics
1. It provides tool and techniques for managerial decision making.
2. It guides the managerial economists.
3. It helps in formulating business policies.
4. It is a tool for demand forecasting.
5. It is a tool for profit planning.
6. It supplies data for analysis and forecasting.
Functions of Managerial Economist
1. Sales forecasting
2. Market research
3. Production scheduling
4. Investment appraisal
5. Environmental forecasting
6. Security management analysis
7. Advise on foreign exchange management.
Responsibilities of Managerial Economist
1. To bring reasonable profit to the company.
2. To make accurate forecast.
3. To participates in public debates.
4. To earn full status in the business firm.
5. To establish contact with individual and data sources.
6. To prepare speeches for business executives.
Relationship of managerial economics with other subjects
1. Economics
The theory of economics is applied in practical business situation for decision making and forward planning.
2. Statistics
Statistical data are used in business analysis to arrive at decisions.
3. Mathematics
In managerial economics, algebra, calculus and geometry are extensively used.
4. Operation research
Operation research deals with optimisation. It applies the principles of statistics, planning and mathematics to arrive at optimisation.
5. Accounting
Accounting data is widely used in managerial economics. The management needs accounting information for decision making.
Basic economic tools in managerial economics
1. Elasticity of demand
It is the degree of responsiveness in the quantity demanded to a change in price.
2. Opportunity cost
It is the cost seen in terms of the opportunity foregone.
3. Marginal principle
Marginal cost and marginal revenues are crucial in pricing decisions.
4. Time perspective
Different decisions have to be taken at different periods of time.
5. Discounting
It is important to calculate present values of future cash flows. For this purpose, principle of discounting is used
6. Capital budgeting
The process of business undertakes to evaluate potential major projects or investments.
Managerial economics as a tool for decision making and forward planning
Decision making
Decision making is the process of selecting one action from two or more alternative course of actions making.
Forward planning
It is the process of making plans to take into account what is likely to happen or be needed in the future.
Steps in Decision Making
1. Identification of objectives.
2. Statement of problems to be studied.
3. Listing of various alternatives.
4. Selection of best alternative.
5. Implementation.
Important Areas of Decision Making
1. Selection of product.
2. Selection of product mix.
3. Selection of method of production.
4. Product line decision.
5. Determination of price and quantity.
6. Replacement decision.
7. Make or buy decision.
8. Shut down decision.
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