Me

By: Naseer Ahmed

University of Balochistan Quetta.

MANAGERIAL ECONOMICS AND MANAGERIAL DECISION MAKING

Economics is “the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.”

ECONOMICS AND MANAGERIAL

DECISION MAKING

Management is the discipline of organizing and allocating a firm’s scarce resources to achieve its desired objectives. Involves the ability to organize and administer various tasks in pursuit of certain objectives.

INTRODUCTION TO ME

How does managerial economics differ from “regular” economics?

There is no difference in the theory; standard economic theory provides the basis for managerial economics.

The difference is in the way the economic theory is applied.

DEFINITIONS OF MANAGERIAL ECONOMICS

Integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. – Prof. Spencer Sigelman.

The purpose of Managerial economics is to show how economic analysis can be used in formulating business policies – Prof. Joel Dean


DECISION MAKING

Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

Managerial economics is (mostly) applied microeconomics.

MANAGERIAL ECONOMICS DEALS WITH

“How decisions should be made by managers to achieve the firm’s goals - in particular, how to maximize profit.”

(Also government agencies and nonprofit institutions benefit from knowledge of economics, i.e. efficient recourse allocation is important for them too...)

MICRO AND MACROECONOMICS

2 major branches of economics

Micro – derived for Greek word micros meaning small

Macro – derived form Greek word macros means aggregative – whole – large

MICROECONOMICS

Branch of economics which is concerned with analysis of behaviour of the individual economic units or variables such as an individual consumer or a producer or the price of a particular product.

Basically deals with individual decision making and the problem of resource allocation.

Examines in particular as to how individual consumers and producers behave and how their behaviors interact

IMPORTANCE AND USES OF MICROECONOMICS

Explains price determination and allocation of resources

Direct relevance in business decision making Serves as a guide for business/ production

planning Serves as a basis for prediction Useful in determination of economic policies

of the government Serves as the basis for welfare economics Explain the phenomena of international trade

MACROECONOMICS

Branch of economics which deals with the aggregate behaviour of the economy as a whole

Macroeconomics is essentially aggregate economics

Study of economic system in general Study of very large, economy – wide

aggregate variables like national income, total savings, total consumption, total investment, money supply, unemployment, price levels, economic growth rate etc.

IMPORTANCE OF MACROECONOMICS

Explains the working of the economy as a whole

Knowledge is indispensable for policy makers Useful for the planner for preparing economic

plans for the country’s development Helpful in international comparison

DISTINCTION BETWEEN MICRO AND MACROECONOMICS

MACRO -

Study of aggregate

Aggregate approach

Variables – agg dd, agg ss, price level etc

MICRO-

Study of individual

Individualistic approach

Variables – indl dd,ss, price etc.

REVIEW OF ECONOMIC TERMS

Microeconomics is the study of individual consumers and producers in specific markets. Supply and demand Pricing of output Production processes Cost structure Distribution of income and output


Macroeconomics is the study of the aggregate economy. National Income Analysis (GDP) Unemployment Inflation Fiscal and Monetary policy Trade and Financial relationships

among nations


Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people.


Resources are factors of production or inputs. Examples:

Land

Labor

Capital

Entrepreneurship


Opportunity cost is the amount or value that must be sacrificed in choosing one activity over the next best alternative.


DECISION MAKING

Relationship to other business disciplines Marketing: Demand, Price Elasticity Finance: Capital Budgeting, Break-Even

Analysis, Opportunity Cost, Economic Value Added

Management Science: Linear Programming, Regression Analysis, Forecasting

Strategy: Types of Competition, Structure-Conduct-Performance Analysis

Managerial Accounting: Relevant Cost, Break-Even Analysis, Incremental Cost Analysis, Opportunity Cost


DECISION MAKING

Questions that managers must answer:

How can we maintain a competitive advantage over our competitors?

Cost-leader? Product Differentiation? Market Niche? Outsourcing, alliances,

mergers, acquisitions?


DECISION MAKING

Questions that managers must answer: What are the risks involved?

Risk is the chance or possibility that actual future outcomes will differ from those expected today.


DECISION MAKING

Types of risk Changes in demand and supply

conditions Technological changes and the effect of

competition Changes in interest rates and inflation

rates Exchange rates for companies engaged

in international trade Political risk for companies with foreign

operations

NATURE OF MANAGERIAL ECONOMICS

Managerial economics aims at providing decision making to firms. It draws heavily on the prepositions of micro economic theory that studies the phenomenon at individual level i.e behaviour of individual consumers, households and firms.


The concepts of economics which ME frequently uses are :

Elasticity of demand.

Marginal cost.

Marginal revenue.

Market structures and their significance in pricing policies.


ME makes use of both Micro & Macro economics. Micro economics assists the firm in forecasting & macro economics studies the aggregate levels. Macro economics indicates the relationship between, for example, level of consumption and national income, level of national income and employment etc.


This helps the management in knowing the level of demand at a future period of time, based on the relationship between the national income and the demand for a particular product.

Eg : Demand for cars, televisions, refrigerators etc can have a impact of changes in the level of national income.


ME is prescriptive in nature. It recommends how a thing should be done in alternative conditions.

Eg: It may be derived from economic analysis the it is more profitable to produce 100 units of a particular product by using 5 machines and 15 workers than using 2 machines and 25 workers.


ME uses a scientific approach. In practice some firms may use simple rules based on past experience. However, the quality of decisions made can be improved by using a systematic approach. This is achieved by the study of ME.

SCOPE OF ME

The scope of ME is so wide that it touches almost all areas of the manager’s decision making. It deals with demand analysis, forecasting, production function, cost analysis, inventory management, resource allocation, capital budgeting. A brief introduction to these areas will give an idea of the scope of ME.

SCOPE OF ME

Demand Analysis and forecasting : A correct analysis of the future demand

for a companies product enables a manager to take decisions related to the production scheduling & inventory management.

For this he has to consider things such as income elasticity and cross elasticity.

This process of accessing the future demand is called as demand forecasting.

SCOPE OF ME

Production function : We know that resources are scarce and

have alternative uses. Inputs play a imp. role in the economics of production.

The factors of production should be combined in a particular way to maximize output.

Alternatively, when the prices of some inputs shoots up, a manager has to work out a change in the use of inputs so as to bring the total costs of production as low as possible.

Thus, production function helps ME.

SCOPE OF ME

Cost analysis :

Cost analysis talks of determinants of costs, relationship between costs and output, forecast of cost and profit etc. which is essential for managerial decision making.

SCOPE OF ME

Inventory management : Large capital of companies is blocked in

inventory. If this capital can be save, it can be used for alternative production priorities.

Tools like ABC analysis etc. help the managers in deciding the levels of inventory.

SCOPE OF ME

Pricing : The price of the product often

determines how much of what product will be purchased.

Merely knowing the cost of production is not enough to set the price. Various other aspects such as the market conditions, conditions of competition, various options available for pricing also have to be considered.

SUBJECT MATTER AND SCOPE OF MICROECONOMICS

Microeconomics

Pricing (Theory of value)

Distribution (Factor Pricing)

Welfare (Welfare economics)

Theory of demand

Theory of Production

Theory of pricing

General Theory of Distribution

Theories of

Rent Wages Interest Profits

THANK YOU

Me

Education

Transcript of Me