Managerial Economics 10 MBA 12

Shalini H S

Managerial Economics Branch of Economics Managerial Economics is the study of Economic Theories, Principles and Concepts which is used in Managerial Decision Making Managerial Economics is the Application of various Theories, Concepts and Principles of Economics in the Business Decisions. It also Includes The Application of Mathematical and Statistical tools in Management decisions.2

Managerial EconomicsApplication of Mathematical And Statistical tools

Economic Theories, Principles and Concepts

Application

Application

Managerial Decision Making

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Managerial EconomicsManagerial Decisions Choice of product Choice of production method Choice of price, Etc

Application of Economic concepts, Theories and Principles in decision Making

Application of Analytical tools such as, Mathematical and Statistical tools

Managerial Economics Application of Economic Concepts, Theories and Analytical tools to find solutions for managerial problems

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Managerial Economics Economics.-Theories -Principles -Concepts Decision Making. -Selection of best alternative out of various possible alternatives. Risk & Uncertainty5

Economics Economics: A Queen of Social Sciences Economics=OIKOS+NOMOS (Greek Words) OIKOS=HOUSE NOMOS=MANAGEMENT According to J.S. Mill Economics is The practical science of production and distribution of wealth. It is the study of How people produce and spend income .

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Economics It talks about Economic Activity and Economic Problem. It is the Study of Logic choice between Scarce resources and unlimited wants Economics is to get the answer to the basic questions of an economy such as, What to produce?, How to produce? And for whom to produce? Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. 7

Economics There are Two Branches Micro Economics: Means Small or Individual . The term MICRO comes from the Greek word MIKROS Which means Small or Individual. Macro Economics: Means Group or Whole. The term MACRO comes from the Greek word MAKROS Which means Large or Whole.8

Micro Economics Micro Economics: It is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular industries. Some of the theories which come under Micro Economics, Theory Theory Theory Theory of of of of Individual/Market Demand. Production and Cost. Markets and price. profit, Etc9

Macro Economics Macro Economics : It deals not with individual quantities as such but with aggregates of these quantities, not with individual incomes but with national income. Some of the theories which come under Macro Economics, Theory of total output and employment. General price level. Theory of Inflation. Theory of trade cycles Economic growth, Etc

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Difference between Managerial Economics and Economics Managerial Economics Narrow and limited Economics scope Comprehensive and It is essentially Micro wider scope in nature and Macro in It has both Micro and analysis Macro in nature It is mainly a It is both Normative Normative science and positive science It is concerned with It is concerned with the application of the formulation of theories and theories and principles of principles economics It discusses general It discusses Individual problems problems11

Nature of Managerial Economics Science as well as Art of decision making. It is essentially Micro in nature but Macro in analysis. It is mainly a Normative science but positive in analysis. It is concerned with the application of theories and principles of economics. It discusses Individual problems. It is dynamic in nature not a Static. It discuss the economic behavior of a firm. It concentrates on optimum utilization of resources. 12

Managerial economics Positive or normative science Positive study of things as they are Normative study of things as they should be

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Scope of Managerial Economics Objectives of a Firm. Demand Analysis and Forecasting. Production and cost analysis. Pricing decisions. Profit management. Capital management. Market structure. Inflation and economic conditions.14

Managerial economics and Decision Making

Decision making:-Decision making on internal affairs . -Decision making on external affairs . Internal affairs talk on internal environment which consists of internal factors such as, Production, Financial, Marketing and Human resource related decisions. External Affairs talk on external environment which consists of external factors such as, PEST related decisions.15

Decision Making Uncertainty : Nothing can be expectable because of the constant changes in the environment both internally as well as externally.

Risk : It is the situation which comes under uncertainty.16

Decision??????????????? How to take decision????????????

By using. Economic Models17

Economic Models Economic model Is the structural and scientific method of constructing or developing Solutions by using basic economic principles , concepts, theories and Quantitative techniques such as mathematical and statistical tools .18

Conclusion for decisions Evaluating results

Testing of Hypothesis

Analysis of data

Data collection

Formulation of hypothesis Defining the problem

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Basic Principles of Managerial Economics

Opportunity cost principle. Marginalism principle. Equi-marginalism principle. Incremental principle. Time perspective principle. Discounting principle.

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Opportunity Cost Principle Choice involves sacrifice. The cost involved with the sacrifice It is the cost of an next best opportunity which is lost will be called as Opportunity cost. Ex: 100 Rs can be used for purchasing book or eating in pizza corner or purchasing of stationeries. Now the cost of purchasing book is also include the cost of Eating pizza.21

Opportunity cost in management

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Marginalism PrincipleMarginal cost and Marginal profit/benefit Marginal cost is the cost which is incurred to produce the next or one more unit. Marginal Revenue is the benefit which is got by producing one more or next unit. Cost will be less and benefit will be more.

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Marginalism Principle Marginal cost (MC)= (TC) n - (TC) n- 1 Marginal Revenue (MR)=(TR) n (TR) n-1 Decision Rule : MR > MC..MR=MC..MR 0 From Q = 1 onwards, MU is declining Principle of diminishing marginal utility As more and more units of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility 59

Total Utility CurveTU 35 Total utility(in utils) 30 25 20 15 10 5 0 1 2 3 4 5 Quantity 6 Q60

Marginal Utility CurveMU Marginal utility (in utils) 20 15 10 5 0 1 -5 Quantity61

Q 2 3 4 5 6

Limitations Homogeneity Suitable time No change in the taste of the consumer Normal persons Constant income62

Uses Determining the price of a commodity Help in explaining paradox of value namely water-diamond paradox Explains the downward sloping of a demand curve Used in direct taxation63

Exceptions Alcoholics Misers Money Reading Hobbies and rare collections Arts64

The law of equi-marginal utility The consumer would distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal

Marginal utility of X commodity Price of X commodity

=

Marginal utility of Y commodity Price of Y commodity

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Assumptions There is perfect competition in the market Utility is measurable in terms of money Income remains constant and it is limited The consumer behaves rationally The MU of money remains constant Utility schedules are independent for different commodities The law of diminishing marginal utility operates66

IllustrationUnits MU Of MU of Y X commo commo dity dity Units MU of MU of X/Price Y/Price

1 2 3 4 5 6

10 9 8 7 6 5

8 7 6 5 3 267

1 2 4

20 18 14 10

24 21 18 15 9 3

3 (Y) 16 5(X) 12 6

Y

Theory of consumers equilibriumM

Price/ Utility

P U 0 1 2 3 4 5 X68

Units of commodity

Theory of Consumers equilibriumY

Mu of X Mu of YP

Utility/ Price

0

1

2

3

4

5

6

X69

Units of commodity X and Y

Significance Helps in the determination of optimum budget Helps in distribution of earnings Entrepreneur can apply this law to maximize his profits Can distribute assets among alternatives Applicable to taxation Useful to a person with limited time70

Limitations Purchase may take place due to desire than rational thinking MU varies with rich and poor Law cannot be applied if certain commodities are not available in the market Utility is subjective concept Works only if the goods are divisible71

REFERENCES 1.MANAGERIAL ECONOMICS -D.N.DWIVEDI 2. BUSINESS ECONOMICS -D.D. CHATURVEDI S.L. GUPTA SUMITRA PAUL 3.MICRO ECONOMICS -JHON KENNADY 4.MANGERIAL ECONOMICS MITHANI 72