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Managerial Economics

I Introduction: Economics can be divided into two broad categories: microeconomics and macroeconomics. Macroeconomics is the study of the economic system as a whole. It includes techniques for analyzing changes in total output, total employment, the consumer price index, the unemployment rate, and exports and imports. Macroeconomics addresses questions about the effect of changes in investment, government spending, and tax policy on exports, output, employment and prices. Only aggregate levels of these variables are considered.

But concealed in the aggregate data are countless changes in the output levels of individual firms, the consumption decisions of individual consumers, and prices of particular goods and services. Although macroeconomic issues and policies command much attention in the media, the microeconomics of the economy also are important and often are of more direct application to the day-to-day problems facing the manager. Microeconomics focuses on the behavior of individual actors on the economic stage: firms and individuals and their interaction in the markets.

Managerial Economics should be thought of as applied microeconomics. That is, managerial economics is an application of that part of microeconomics focusing on those topics of greatest interest and importance to managers. These topics include demand, production, cost, pricing, market structure, and government

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regulation. A strong grasp of the principles that govern the economic behavior of firms and individuals is an important managerial talent. In general, managerial economics can be used by the goal oriented managers in two ways.

First, given an existing economic environment, the principle of managerial economics provide a framework for valuating whether resources are being allocated efficiently within a firm. For example, economics can help the manager determine if reallocating labor from a marketing activity to the production line could increase profit. Second, these principles help managers respond to various economic signals. These signals, for example, are innovation of low cost technology, changes in the prices of different inputs etc.

The tools developed in managerial economics increase the effectiveness of decision making by expanding and sharpening the analytical framework used by managers to take decision. Thus, a working knowledge of the principles of managerial economics can increase the value of both the firm and the manager. Individuals and firms are the fundamental participants in a market economy. Individuals own or control resources that have value to firms because they are necessary inputs in the production process. These resources are broadly classified as labor, capita, and natural resources.

Of course, there are many types and grades of each resource. Labor specialties vary from street sweepers to brain surgeons; capital goods range from broom to electronic computers. Most people have labor resources to sell, any many own capital and / or natural resources that are rented, loaned, or sold to firms to be used as inputs in the production process. The money received by an individual from the sale of these resources is called a factor payment. This income to individuals then is used to satisfy their consumption demands for goods and services.

The interaction between individuals and firms occurs in two distinct arenas. Second, there is a market for factors of production where labor, capital, and natural resources are traded. Subject Matter of Managerial Economics: Managerial Economics- also called Business Economics- is the application of economic theory and methodology to business. Business involves decision-making. Different aspects of business need the attention of the chief executive; he may be called upon to choose an option among the many open to him.

For this purpose the executive has to decide upon various aspects. Business decision can be classified into different categories as follows: Financial decisions: These relate to costing, budgeting, accounting, auditing, tax planning, portfolio composition, capital structure, dividend striation, etc. Production decisions: These relate to quantity of raw materials as well as output, inventory control, choice of technology, technicians, plant location and layout, production scheduling, maintenance, pollution control, etc.

Personnel decisions: These relate to recruitment, selection, training, development, placement, promotion, transfer, retirement or retrenchment of staff, etc. Marketing decisions: These relate to sales volume, sales promotion, market research, packaging, after sales service, new product positioning, etc. Miscellaneous decisions: These relate to information systems, data processing, public relations, etc. It would be in the interest of the business firm to reach the optimal decision- the one that will promote that goal of the business firm.

A scientific formulation of the business problem and finding its optimal solution requires that the business firm may be equipped with a rational methodology and appropriate tools. Managerial economics meets these needs of the business firm. Managerial economics serves as a bridge between economic theory and business decision -making. Definitions of Managerial Economics Different economists have defined managerial economics differently. Some important views have been as follows: McCain and Merman define managerial economics as ” the use of economic models of thought to analyses business situation. According to Spencer and Glaswegian, ” managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management. ” In the words of D. S. Watson, managerial economics is ” price theory in the service of business executives. ” Brigham and Pappas view that managerial economics is ” the application of economic theory and methodology to business administration practice. ” Hogue believes that managerial economics is ” a fundamental academic subject which seeks to understand and to analyses the problems of business decision- making. E. Mansfield says, “Managerial economics is concerned with application of economic concepts and economic analysis to the problems of formulating material managerial decisions. ” According to Hailstones and Retell, ” Managerial economics is the application of economic theory and analysis o practices of business firms and other institutions, such as health care facilities and government agencies. ” Michigan and Moyer put it as “Managerial economics deals with the application of economic theory and methodology to decision-making problems faced by public, private and non-profit institutions.

Managerial economics extracts from economic theory those concepts and techniques that enable the decision maker to allocate efficiently the resources of the organization. ” In the words of Mark Herschel and James Pappas, “Managerial economics applies economic theory lolls and techniques of economic analysis to solve managerial problems, managerial economics links, traditional economics with the decision-sciences to develop vital tools for managerial decision-making. ” Evans J.

Douglas says. ” Managerial economics is concerned with the application of economic principles and methodologies to the decision-making process within the firm or organization under conditions of uncertainty. ” These different definitions bring out clearly the following features of the subject: Managerial economics is concerned with decision-making, I. E. , it deals with identification of economic choices and allocation of scare resources. It is goal- oriented and prescriptive.

It deals with how decisions should be made by business firms to achieve the organizational goals. It is prescriptive. It is concerned with those analytical tools which are useful in improving decision-making. Managerial economics is both conceptual and metrical. Managerial economics provides a link between traditional economics and the decision sciences for managerial decision- making. In short, managerial economics is the integration of economic theory and planning by management.

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