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ood Morning

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Economics in general takes a

positive and predictive approach

not prescriptive or normative

Try to explain what is

not what should be

the main objective is to understand how a market

economy works

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Economics in general is Not Very concernedabout the descriptive realism of assumptions:

Example : I assume X

does not mean I believe X to be true

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Topics to share:

The Definition and Scope of

Managerial Economics

Learning Objectives:1. To appreciate the subject matter of

Managerial Economics

2. To understand the analytical approach used in

Managerial Economics

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What is Managerial Economics?

DouglasManagerial economics

is the applicationof

economic principles andmethodologies to the

decision-making process

within the firm or organization.

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What is Managerial Economics?

Pappas & Hirschey

Managerial economics applies

economic theory and methodsto business and administrative

decision-making.

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What is Managerial Economics?

Howard Davies and Pun-Lee Lam -

It is the applicationof economic analysis

to business problems; it has its origin in

theoretical microeconomics.

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These Definitions Cover a Number of

Different Approaches

1. Analysis based on the theory of the firm

2. Analysis based upon management sciences

3. Analysis based upon industrial economics

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Managerial Economics subject matter revolves around

the

.

Theory of the firm

approach

two aspects

Financial

aspect

Physical

aspect

Comprises

2 sides

Cost side

Revenue

side

gain maximumpossible profits

Theory of the Firm

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Th f th Fi

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Towards the end, the firm

1. has to fix price2. predict or forecast demand

3. consider market morphology

4. work out price output relationscondition for profit maximization

condition for loss minimization

5. Work out means for survival or decide

to shut-down

Theory of the Firm

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Th f th Fi A t

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Financial aspect Physical aspectrequires managers to consider

Input-output relationships or production process

Optimization of the available resources

to produce maximum, desirable output

Project planning Capital budgeting

Use of mathematical tools like diagrams, derivatives, correlation, regression,

probability theory, etc.

Theory of the Firm Aspects

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What are these limitations?

If the aim is prediction, unrealistic assumptionsare acceptable and may be needed;

for instance: the firm may be assumed to behave as if

its managers had perfect knowledge of its environment

If the aim is to produce decision-rules which can

be applied by practising managers, unrealistic

assumptions will produce decision-rules whichare not operational

for instance: set output and price

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How Can Managerial Economics

Assist Decision-Making?

1. Adopt a general perspective,

not a sample of one

2. Simple models provide stepping stone

to more complexity and realism

3. Thinking logically has value itself

and can expose sloppy thinking

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Why Managerial Economics?

A powerful analytical engine.

A broader perspective on the firm.

what is a firm?

what are the firms overall objectives?

what pressures drive the firm towards profit and

away from profit

The basis for some of the more rigorous analysis

of issues in Marketing and Strategic Management.

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In industr ial economics

(or industr ial

organization), the

emphasis is (or was) uponthe behavior of the

whole industry, in

which the firm is simplya component.

In manager ial economics,

the emphasis is upon the

firm, the

environment inwhich the firm finds

itself, and the

decisions whichindividual firms have to

take.

Links between Managerial Economics

and Industrial Economics

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What is Industrial Organization?

It is the study of industry.

It is the study of marketsfor goods and of thefirms which produce them.

It studies how the performance of anindustry is related to its structure, that is, to the

number and size of firms it contains.

It is more concerned with

why markets are structured the way they are

and behave the way they do.

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Management science: is

essentially concerned with

techniques for the

improvement of decision-

making and hence it isessentially normative; firms

are not assumed to find the

optimal solutions for

themselves. They are foundby the researchers who then

present them as prescriptions

for what the firm should do.

Manager ial economics

is often concerned with

finding optimal solutions to

decision problems.However,the primary purpose of using

models is to predict how firms

will behave, not to advise them

what ought to do. Managers

are assumed to find the optimal

solutions for themselves and

that is how predictions are

made.

Links between

Managerial Economics and Management Science

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Management without

Economics has no roots&

Economics without managementbears no fruits!

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Thank you!

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