MANAGERIAL ECONOMICS UNIT - 1

MEANING & DEFINITION The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ which can be divided into two parts: (a) ‘Oikos’, which means ‘Home’, and (b) ‘Nomos’, which means ‘Management’. Adam Smith, considered to be the founding father of modern Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply as the study of wealth. According to Robbins, “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”.

NATURE Economics as a science: Economics as an art: Collection of facts Measurement Explanation Validity of laws Economics as an art: An art is a system of rules for the attainment of given ends- J.N.Keynes

SCOPE A. Economic Activities: Production Consumption Investment Exchange B. Economic systems: Capitalization Socialism Mixed economy C. Economic policies D. Econometrics E. Applied economics

LIMITATIONS Study of human activities only Study of rational man Assumption based principles Economic laws are not exact & universal Economics is non controversial

Branches of Economics Economics Micro-economics Macro-economics

MICRO ECONOMICS Microeconomics is the study of individuals, households and firms' behavior in decision making and allocation of resources. It generally applies to markets of goods and services and deals with individual and economic issues.

NATURE OF MICRO ECONOMICS Following are some important characteristics of micro-economics- Nature of analysis Method Scope Application Nature of assumptions

Theory of economic welfare Scope of micro-economics Commodity pricing Demand theory Supply theory Factor pricing theory Rent Wages Interest Profit Theory of economic welfare What to produce? How to produce? When to produce? For whom it is to be produced?

IMPORTANCE OF MICRO ECONOMICS Individual behaviour analysis Resource allocation Price mechanism Economic policy Free enterprise economy Public finance Foreign trade Social welfare

LIMITATION OF MICRO ECONOMICS Unrealistic assumption Inadequate data Ceteris Paribus

MACRO ECONOMICS Macroeconomics is the study of aggregates or averages covering the entire economy, such as total employment, national income, national output, total investment, total consumption, total savings, aggregate supply, aggregate demand, and general price level, wage level, and cost structure. In other words, it is aggregative economics which examines the interrelations among the various aggregates, their determination and causes of fluctuations in them. Macro economics is, that part of economics which studies the overall averages and aggregates of the system- By Boulding

NATURE OF MACRO ECONOMICS Short run nature Study of economics as a whole A systemised and comprehensive body of thought Reformed capitalism or neo-liberalism A monetary economics Mainly intituitional Importance of state intervention Crucial ole of investment Comaritive static analysis Based on firm empirical foundation General theory Role of consumption and national income

SCOPE OF MACRO ECONOMICS Theory of national income Theory of employment Theory of money Theory of general price level Theory of economic growth Theory of international trade To understand the working of economy In trade cycles For understanding the behaviour of individual units

IMPORTANCE OF MACRO ECONOMICS Helpful in understanding the functioning of an economy Study of national income Formulation of economic policy Study of trade cycles Changes in general price level Economic growth Helpful in the study of micro-economics Estimate of material welfare International comparisons Economic planning

LIMITATION OF MACRO ECONOMICS Dependence on individual units Hetrogeneous units Composition of structure of the aggregate is more important than the aggregate itself Different effects of the aggregates Limited application Ignores the contribution of individual units

DIFFERENCES

MANAGERIAL ECONOMICS Managerial economics is concerned with the application of economic principles and methodologies to the decision process within the organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management. McNair & Meriam calculate: “Managerial economics deals with the use of economic modes of thought to analyse business situation". Joel Dean declares:"The purpose of managerial economics is to show how economic analysis can be used in formulating business policies".

ECONOMIC THEORY MANAGERIAL ECONOMICS BUSINESS MANAGEMENT

NATURE OF MANAGERIAL ECONOMICS Micro economic in nature Pragmatic Related to normative economics Conceptual in nature Utilises some theories of macro-economics Problem solving in nature Deals with the application of economics Study of allocation of resources Interdisciplinary Science Art

SCOPE OF MANAGERIAL ECONOMICS Demand analysis and forecasting Cost and production analysis Pricing decision, policies and practices Profit management Capital management Analysis of business environment Allied disciplines

Relationship of M.E. With Other Areas Managerial economics and statistics Managerial economics and mathematics Managerial economics and accounting Managerial economics and operations research Managerial economics and theory of decision making Managerial economics and economics

USES OF MANAGERIAL ECONOMICS Integration of economic theory Solution to practical business problems Optimum use of scarce resources Used for overall development In decision making

Fundamental concepts of Managerial Economics Opportunity cost principle Principle of time perspective Incremental principle Discounting principle Marginal principle Scarcity principle Equi-marginal principle Principle of risk and uncertainty

Significance in Decision Making Production decisions Inventory decisions Cost decisions Marketing decisions Investment decisions Personnel decisions

Role of Managerial Economist Analysis of External factors Analysis of Internal factors Specific functions

RESPONSBILTIES OF MANAGERIAL ECONOMIST To make reasonable profits on capital employed Successful forecasts Knowledge of sources of economic information His status in the firm

LIMITATION OF MANAGERIAL ECONOMICS Inadequate Data Narrow Assumptions