Concepts and Models of managerial economics The discipline of managerial economics deals with aspects of economics and tools of analysis, which are employed by business enterprises for decision-making. Business and industrial enterprises have to undergo various decisions that entail managerial issues and decisions. Decision-making can be delineated as a process where a particular course of action is chosen from a number of alternatives.
This demands an unclouded perception of the technical and environmental conditions, which are integral to decision making. The decision maker must possess a thorough knowledge of aspects of economic theory and its tools of analysis. The basic concepts of decision-making theory have been culled from microeconomic theory and have been furnished with new tools of analysis. Statistical methods, for example, are pivotal in estimating current and future demand for products.
The methods of operations research and programming proffer scientific criteria for maximizing profit, minimizing cost and determining a viable combination of products. Decision-making theory and game theory, which recognize the notations of uncertainty and imperfect knowledge under which business managers operate, have contributed to systematic methods of assessing investment opportunities. Managerial economics draws on a wide variety of economic concepts, tools and techniques in the decision-making process.
These concepts can
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In the process of accomplishing this, they employ society’s scarce resources, provide employment and pay taxes. If economic activities of society can be simply put into two categories- production and consumption- firms are considered the most basic economic entities on the production side, while nonusers form the basic economic entities on the consumption side. The behavior of firms is usually analyzed in the context of an economic model, which is an idealized version of a real-world firm.
The basic economic model of a business enterprise is called the theory of the firm. A firms profit maximizing output decisions take into account the market structure under which they are operate. There are four kinds of market organizations: perfect competition, monopolistic competition, oligopoly and monopoly. Perfect competition and monopoly are two extremes of market tuitions. Other forms of market such as oligopoly and monopolistic competition fall in between these two extremes.
Oligopoly and monopolistic competition are the market situations characterized by imperfect competition. The term ‘Monopoly has been derived from Greek term ‘Monopolies’ which means a single seller. Thus, monopoly is a market condition in which there is a single seller of a particular his product. Pure monopoly rarely exists in reality. It is merely a theoretical concept, because even if there were no close substitutes, some kind of competition loud always be there, such as a choice between decorating a house or buying a car.
However, even though pure monopolies are a rare phenomenon in developed countries, they are found in developing countries like India in the form of State monopolies, for example the Post and Telegraph Department of the Government of India. In the real world, market is neither perfectly competitive nor a monopoly. The great majority of imperfectly competitive producers in the real world produce goods, which are neither completely different nor completely same. They produce odds, which are analogous to those produced by their rivals.
This means that the goods produced in the market are close substitutes. It follows that such producers must be concerned about the way in which the action of these rivals affects their own profits. This kind of market is known as ‘monopolistic competition’ or group equilibrium. Here there is competition, which is keen, though not perfect, between firms manufacturing very similar products, for example market for toothpaste, cosmetics, watches, etc. The type of market condition, which is most appropriate in the today’s economy, is oligopoly.
It is characterized by mutual interdependence among a few sellers who control the total market supply. Oligopoly, therefore, occurs when there are only a few sellers. It differs from both monopoly and perfect competition and producers, have significant control over major portion of the market demand, with or without differentiated product. Thus, oligopoly is a market situation in which a few firms producing an identical product or the products, which are close substitutes to each other, compete with each other.