Objectives of the Session By the end of this session, it will be hoped to achieve the following objectives;  To understand the nature and scope of managerial economics  Able to introduce and define managerial economics,  To have understanding about the economic theory and tools of decision sciences

Continue  to explain the relationship between managerial economics, economic theory, decision sciences and functional areas of business administration.  To discuss the importance of managerial economics

Nature and Scope of Managerial Economics  Definition of Managerial Economics  Relationship to other fields of Study Relationship to the Economic Theory Relationship to the Economic Theory Relationship to the Decision Sciences Relationship to the Decision Sciences Relationship to the Functional Areas of Business Administration Studies Relationship to the Functional Areas of Business Administration Studies

Definition of Managerial Economics  Salvatore defines as; “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its objectives most efficiently.”  Douglas defines as; “Managerial economics is the application of economic principles and methodologies to the decision-making process within the firm or organization.”

Continue  It can be seen as a means to an end by managers, in terms of finding the most efficient way of allocating their scarce resources and reaching their objectives.  As an approach to decision-making, managerial economics is related to economic theory, decision sciences and business functions.

 This definition can be well explained with the help of following diagram;

Management Decision Problems  Examples;  A hospital may seek to treat as many patients as possible at an adequate medical standard with its limited physical resources (i.e. physicians, technicians, nurses, equipment, beds etc.) and budget.  The goal of a state university may provide an adequate education to as student as possible subject to the physical and financial constraints it faces.  Similarly, a government agency may investigate to provide a particular service to as many people as possible the lowest feasible cost.

Relationship to Economic Theory  Economic theory seeks to predict and explain economic behaviour. It begins with a model, which is the abstract of many details surrounding an event and seeks to identify a few of the most important determinants of the event.  For example, economic theory assumes that firm seeks to maximize profits, thus it predicts how much of particular commodity the firm should produce under different form of market structure.

Continue  Economic theory is mainly divided into microeconomics and macroeconomics.  Microeconomics is the study of the economic behavior of individual decision-making units –individual consumers, resource owners, and business firms in an economy.  Macroeconomics is the study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole.

Continue  The main branch of economic theory with which managerial economics is related is microeconomics. In particular, the following aspects of microeconomic theory are relevant:  theory of the firm  theory of consumer behaviour (demand)  production and cost theory (supply)  price theory  market structure and competition theory

Continue  There is one main difference between the emphasis of microeconomics and that of managerial economics:  the former tends to be descriptive, explaining how markets work and what firms do in practice,  while the latter is often prescriptive, stating what firms should do, in order to reach certain objectives.

Relationship to Decision Sciences  The decision sciences provide the tools and techniques of analysis used in managerial economics.  Decision Sciences comprise of mathematical economics and econometrics.  Mathematical Economics expresses and analyzes economic models using the tools of mathematics.  Econometrics employs statistical methods to estimate and test economic models using empirical data.

Relationship to Functional Areas of Business Administration  Functional areas of business administration studies include accounting and finance, marketing, human resource management and production.  These disciplines study the business environment in which the firm operates and therefore the background for managerial decision making.

Continue  For example  A production department may want to plan and schedule the level of output for the next quarter,  the marketing department may want to know what price to charge and how much to spend on advertising,  the finance department may want to determine whether to build a new factory to expand capacity, and

Continue  the human resources department may want to know how many people to hire in the coming period and what it should be offering to pay them.  All of these functional areas can apply the theories and method in the context of the particular situation and tasks that they have to perform.

Conclusion  Thus managerial economics can be regarded as an overview course that integrates economic theory, decision sciences, and the functional areas of business administration studies and examines how they interact with one another as the firm attempts to achieve its goal most efficiently.

Basic process of decision making  It is important to note that the goals and constraints may differ from case to case, however the basic decision-making process is the same as it can be divided into five basic steps; 1. Define the problem. 2. Determine the objective 3. Identify possible solutions 4. Select the best possible solution 5. Implement the decision

Nature of Managerial Economics; A further note  Managerial Economics is micro-economic in character.  Managerial Economics largely uses that body of economic concepts and principles, which is known as 'Theory of the firm' or 'Economics of the firm'.  Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made.  Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem.

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Scope of Managerial Economics  The scope of economics can further be understood with following;  Demand and Supply analysis: It deals with various aspects of demand and supply of a commodity. Certain important aspects of demand and supply analysis are demand and supply schedules, curves and functions, law of demand and supply and their limitations, elasticity of demand and supply and factors influencing demand and supply.

Continue  Production analysis: microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.  Pricing analysis: Pricing is a very important area of Managerial Economics. In fact, the success of a business firm largely depends on the correctness of the prices decisions taken by it. The important aspects dealt with under this area are :- Price Determination in various Market Forms, Pricing methods, Differential Pricing, Product-line Pricing and Price Forecasting.

Continue  Capital budgeting: Investment theory is used to examine a firm's capital purchasing decisions  Risk analysis: various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision.

Continue  The various aspects outlined above represent the major uncertainties which a firm has to face with, viz., demand uncertainty, cost uncertainty, price certainty, profit uncertainty, and capital uncertainty. It can, therefore, be concluded that the subject matter of Managerial Economics consists of applying economic principles and concepts towards adjusting with various uncertainties faced by a firm.

Importance of managerial economics  Managerial economics has been receiving more attention in business as managers become more aware of its potential as an aid to decision-making, and this potential is increasing all the time. This is happening for several reasons:  It is becoming more important for managers to make good decisions and to justify them, as their accountability either to senior management or to shareholders increases.

Continue  As the number and size of multinationals increases, the costs and benefits at stake in the decision-making process are also increasing.  In the age of plentiful data it is more imperative to use quantitative and rationally based methods, rather than ‘intuition’.

Continue  The pace of technological development is increasing with the impact of the ‘new economy’. There is no doubt that there is an increased need for economic analysis because of the greater uncertainty and the need to evaluate it.  Improved technology has also made it possible to develop more sophisticated methods of data analysis involving statistical techniques. Modern computers are adept at ‘number-crunching’, and this is a considerable aid to decision-making that was not available to most firms until recent years.

Business Versus Economic Profit  Business Profit  Economic Profit