INTRODUCTION TO MANAGERIAL ECONOMICS

 INTRODUCTION TO MANAGERIAL ECONOMICS 

Introduction to Economics 

Economics is a study of human activity both at individual and national level. Any activity involved in efforts aimed at earning money and spending this money to satisfy our wants such as food, Clothing, shelter, and others are called “Economic activities”. 

It was only during the eighteenth century that Adam Smith, the Father of Economics, defined economics as the study of nature and uses of national wealth’. 

Definition: 

Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes “Economics is a study of man’s actions in the ordinary business of life: it enquires how he gets his income and how he uses it”. 

Prof. Lionel Robbins defined Economics as “the science, which studies human behavior as a relationship between ends and scarce means which have alternative uses”. 

Microeconomics 

The study of an individual consumer or a firm is called microeconomics. 

• Micro means ‘one millionth’. 
• Microeconomics deals with behavior and problems of single individual and of micro organization. 
• It is concerned with the application of the concepts such as price theory, Law of Demand and theories of market structure and so on. 

Macroeconomics: 

• The study of ‘aggregate’ or total level of economic activity in a country is called macroeconomics. 
• It studies the flow of economics resources or factors of production (such as land, labor, capital, organization and technology) from the resource owner to the business firms and then from the business firms to the households. 
• It is concerned with the level of employment in the economy. 
• It discusses aggregate consumption, aggregate investment, price level, and payment, theories of employment, and so on.

MANAGERIAL ECONOMICS 

Managerial Economics refers to the firm’s decision making process. It could be also interpreted as “Economics of Management” or “ Industrial economics “ or “Business economics”. 

Nature of managerial Economics: 

1. Close to microeconomics : 

Managerial economics is concerned with finding the solutions for different managerial problems of a particular firm. Thus, it is more close to microeconomics. 

2. Operates against the backdrop of macroeconomics : 

The macroeconomics conditions of the economy are also seen as limiting factors for the firm to operate. In other words, the managerial economist has to be aware of the limits set by the macroeconomics conditions such as government industrial policy, inflation and so on.

3. Normative statements: 

• A normative statement usually includes or implies the words ‘ought’ or ‘should’. They reflect people’s moral attitudes and are expressions of what a team of people ought to do 

• . Such statement are based on value judgments and express views of what is ‘good’ or ‘bad’, ‘right’ or ‘ wrong’. 

• One problem with normative statements is that they cannot to verify by looking at the facts, because they mostly deal with the future. Disagreements about such statements are usually settled by voting on them. 

4. Prescriptive actions: 

• Prescriptive action is goal oriented. 

• Given a problem and the objectives of the firm, it suggests the course of action from the available alternatives for optimal solution. 

• It also explains whether the concept can be applied in a given context on not. For instance, the fact that variable costs are marginal costs can be used to judge the feasibility of an export order. 

5. Applied in nature: 

• ‘Models’ are built to reflect the real life complex business situations and these models are of immense help to managers for decision-making. 

• The different areas where models are extensively used include inventory control, optimization, project management etc. 

• In managerial economics, we also employ case study methods to conceptualize the problem, identify that alternative and determine the best course of action. 

6. Offers scope to evaluate each alternative: 

• Managerial economics provides an opportunity to evaluate each alternative in terms of its costs and revenue.

 • The managerial economist can decide which is the better alternative to maximize the profits for the firm. 

7. Interdisciplinary: 

• The contents, tools and techniques of managerial economics are drawn from different subjects such as economics, management, mathematics, statistics, accountancy, psychology, organizational behavior, sociology and etc. 

Scope of Managerial Economics: 

Managerial economics refers to its area of study. Managerial economics, Provides management with a strategic planning tool that can be used to get a clear perspective of the way the business world works and what can be done to maintain profitability in an ever-changing environment. 

Managerial economics is primarily concerned with the application of economic principles and theories to five types of resource decisions made by all types of business organizations. 

a. The selection of product or service to be produced. 

b. The choice of production methods and resource combinations. 

c. The determination of the best price and quantity combination 

d. Promotional strategy and activities. 

e. The selection of the location from which to produce and sell goods or service to consumer 

The scope of managerial economics covers two areas of decision making 

• Operational or Internal issues 

• Environmental or External issues 

A. OPERATIONAL ISSUES: 

Operational issues refer to those, which are within the business organization and they are under the control of the management. Those are: 

1. Theory of demand and Demand Forecasting 

2. Pricing and Competitive strategy 

3. Production cost analysis 

4. Resource allocation 

5. Profit analysis 

6. Capital or Investment analysis 

7. Strategic planning 

1. Demand Analyses and Forecasting: 

• Demand analysis also highlights for factors, which influence the demand for a product. This helps to manipulate demand. Thus demand analysis studies not only the price elasticity but also income elasticity, cross elasticity as well as the influence of advertising expenditure with the advent of computers. 
• Demand forecasting has become an increasingly important function of managerial economics. A firm can survive only if it is able to the demand for its product at the right time, within the right quantity. Understanding the basic concepts of demand is essential for demand forecasting 

2. Pricing and competitive strategy: 

• Pricing decisions have been always within the preview of managerial economics. Price theory helps to explain how prices are determined under different types of market conditions. 
• Competitions analysis includes the anticipation of the response of competitions the firm’s pricing, advertising and marketing strategies. Product line pricing and price forecasting occupy an important place here. 

3. Production and cost analysis: 

• Production analysis is in physical terms. 
• While the cost analysis is in monetary terms cost concepts and classifications, cost-output relationships, economies and diseconomies of scale and production functions are some of the points constituting cost and production analysis. 

4. Resource Allocation: 

• Managerial Economics is the traditional economic theory that is concerned with the problem of optimum allocation of scarce resources. 
• Marginal analysis is applied to the problem of determining the level of output, which maximizes profit. 
• In this respect linear programming techniques has been used to solve optimization problems. In fact lines programming is one of the most practical and powerful managerial decision making tools currently available. 

5. Profit analysis: 

• Profit making is the major goal of firms. There are several constraints here an account of competition from other products, changing input prices and changing business environment hence in spite of careful planning, there is always certain risk involved.
• Managerial economics deals with techniques of averting of minimizing risks. Profit theory guides in the measurement and management of profit, in calculating the pure return on capital, besides future profit planning. 

6. Capital or investment analyses: 

• Capital is the foundation of business. Lack of capital may result in small size of operations. Availability of capital from various sources like equity capital, institutional finance etc. may help to undertake large-scale operations. 
• Hence efficient allocation and management of capital is one of the most important tasks of the managers. 
• The major issues related to capital analysis are: 

1.The choice of investment project 

2.Evaluation of the efficiency of capital 

3.Most efficient allocation of capital. 

Knowledge of capital theory can help very much in taking investment decisions. This involves, capital budgeting, feasibility studies, analysis of cost of capital etc. 

7. Strategic planning: 

• Strategic planning provides a long-term goals and objectives and selects the strategies to achieve the same. The perspective of strategic planning is global. 
• Strategic planning has given rise to be new area of study called corporate economics.

 B. Environmental or External Issues: 

They refer to general economic, social and political atmosphere within which the firm operates. A study of economic environment should include: 

The type of economic system in the country.

a. The general trends in production, employment, income, prices, saving and investment. 

b. Trends in the working of financial institutions like banks, financial corporations, insurance companies 

c. Magnitude and trends in foreign trade; 

d. Trends in labour and capital markets; 

e. Government’s economic policies viz. industrial policy monetary policy, fiscal policy, price policy etc. 

• The social environment refers to social structure as well as social organization like trade unions, consumer’s co-operative etc. 
• The Political environment refers to the nature of state activity, chiefly states’ attitude towards private business, political stability etc. 
• The environmental issues highlight the social objective of a firm i.e.; the firm owes a responsibility to the society. Private gains of the firm alone cannot be the goal.