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UNIT 1 CONCEPT OF MANAGERIAL ECONOMICS (continue).

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Presentation on theme: "UNIT 1 CONCEPT OF MANAGERIAL ECONOMICS (continue)."— Presentation transcript:

1 UNIT 1 CONCEPT OF MANAGERIAL ECONOMICS (continue)

2 After going through this unit, you will be able to: Explain the meaning and definition of managerial economics Elucidate on the characteristics and scope of managerial economics Describe the techniques of managerial economics Explain the application of managerial economics in various aspects of decision Making Explicate the application of managerial economics in marginal analysis and optimization.

3 Managerial Economics bridges the gap between economic theory and business practice Managerial Economics can be defined as amalgamation of economic theory with business practices so as to ease decision making and future planning by management. Managerial Economics is a science dealing with effective use of scarce resources. Study of Managerial Economics helps in enhancement of analytical skills, assists in national configuration as well as solution of problems. The key of Managerial Economics is the microeconomic theory of the firm. It lessens the gap between economics in theory and economics in practice.

4 Economic Analysis and Business Decisions Business decision-making basically involves the selection of best out of alternative opportunities open to the business organization. Decision making processes involve four main phases, including: Phase One: Determining and defining the objective to be achieved. Phase Two: Collection and analysis of information on economic, social, political, and technological environment

5 Phase Three: Inventing, developing and analyzing possible course of action Phase Four: Selecting a particular course of action from available Alternatives. phases two and three are the most crucial in business decision-making. They put the managers analytical ability to test and help in determining the appropriateness and validity of decisions in the modern business environment.

6 in this area of decision-making that economic theories and tools of economic analysis make the greatest contribution in business.

7 1.3 Techniques of Managerial Economics Managerial economics draws on a wide variety of economic concepts, tools and techniques in the decision-making process. These concepts can be categorized as follows: (1)the theory of the firm, which explains how businesses make a variety of decisions. (2) The theory of consumer behavior, which describes the consumer's decision-making process (3) the theory of market structure and pricing, which describes the structure and characteristics of different market forms under which business firms operate.

8 1.4 Managerial Economics - Its application in Marginal Analysis and Optimization APPLICATION OF MANAGERIAL ECONOMICS Tools of managerial economics can be used to achieve virtual all the goals of a business organization. Typical managerial decision-making may involve one of the following issues: Decisions pertaining to the price of a product and the quantity of the commodity to be produced

9 Decisions regarding manufacturing product/part/component or outsourcing to/purchasing from another manufacturer Choosing the production technique to be employed in the production of a given product Decisions relating to the level of inventory of a product or raw material a firm will maintain Decisions regarding the medium of advertising and the intensity of the advertising campaign Decisions pertinent to employment and training Decisions regarding further business investment and the modes of financing the investment

10 1.4.2 TOOLS OF DECISION SCIENCE AND MANAGERIAL ECONOMICS Managerial decision making uses both economic concepts and tools, and techniques of analysis provided by decision sciences. The major categories of these tools and techniques are: optimization, statistical estimation, forecasting. These methodologies are briefly explained below to illustrate how tools of decision sciences are used in managerial decision making.

11 1- Optimization: What is meant of optimization techniques in managerial economics? Managerial techniques for select best element from several alternatives to maximize the effectiveness or the performance of the organization. Optimization techniques are probably the most crucial to managerial decision making. The manager attempts to produce the most optimal decision, consistent with stated managerial objectives. Thus, an optimization problem can be stated as maximizing an objective subject to specified constraints.

12 In the profit maximization example, the profit maximizing condition requires that the firm choose the production level at which marginal revenue equals marginal cost. This condition is obtained from an optimization exercise. Depending on the problem a manager is trying to solve, the conditions for the optimal decision may be different.

13 2. Statistical estimation: A number of statistical techniques are used to estimate economic variables of interest to a manager 3. Forecasting: It is a method or a technique to predict many future aspects of a business or any other operation. The long-term success of any organization has close association with the propensity of the management of the organization to foresee its future and develop appropriate strategies to deal with the likely future scenarios. Intuition, good judgment and knowledge of economic conditions enables the manager to 'feel' or perhaps anticipate the likelihood in the future.

14 In addition, if the forecaster is able to identify the factors that influence sales, historical data on these factors (variables) can also be used to generate forecasts of future sales. There are many forecasting techniques available to the person assisting the business in planning its sales.

15 Assignment (1)Discuss the important phases of business decision making processes. (2)Discuss Theory of Consumer Behaviour in detail. (3)Discuss Forecasting as a tool of DECISION SCIENCE AND MANAGERIAL ECONOMICS.

16 (4) How is Managerial Economics applied in analysis and decision-making?


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