Managerial Economics

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ECONOMICS FOR MANAGERS UNIT I Introduction: Economics can be divided into two broad categories: microeconomics and macroeconomics. Macroeconomics is the study of the economic system as a whole. It includes techniques for analysing changes in total output, total employment, the consumer price index, the unemployment rate, and exports and imports. Macroeconomics addresses questions about the effect of changes in investment, government spending, and tax policy on exports, output, employment and prices. Only aggregate levels of these variables are considered. But concealed in the aggregate data are countless changes in the output levels of individual firms, the consumption decisions of individual consumers, and prices of particular goods and services. Although macroeconomic issues and policies command much attention in the media, the microeconomics of the economy also are important and often are of more direct application to the day-to-day problems facing the manager. Microeconomics focuses on the behaviour of individual actors on the economic stage: firms and individuals and their interaction in the markets. Managerial Economics should be thought of as applied microeconomics. That is, managerial economics is an application of that part of microeconomics focusing on those topics of greatest interest and importance to managers. These topics include demand, production, cost, pricing, market structure, and government regulation. A strong grasp of the principles that govern the economic behaviour of firms and individuals is an important managerial talent. In general, managerial economics can be used by the goal oriented managers in two ways. First, given an existing economic environment, the principle of managerial economics provide a framework for evaluating whether resources are being allocated efficiently within a firm. For example, economics can help the manager determine if reallocating labour from a marketing activity to the production line could increase profit. Second, these principles help managers respond to various economic signals. These signals, for example, are innovation of low cost technology, changes in the prices of different inputs etc. The tools developed in managerial economics increase the effectiveness of decision making by expanding and sharpening the analytical framework used by managers to take decision. Thus, a working knowledge of the principles of managerial economics can increase the value of both the firm and the manager. Individuals and firms are the fundamental participants in a market economy. Individuals own or control resources that have value to firms because they are necessary inputs in the production process. These resources are broadly classified as labour, capita, and natural resources. Of course, there are many types and grades of each resource. Labour specialities vary from street sweepers to brain surgeons; capital goods range from broom to electronic computers. Most people have labour resources to sell, any many own capital and / or natural resources that are rented, loaned, or sold to firms to be used as inputs in the production process. The money received by an individual from the sale of these resources is called a factor payment. This income to individuals then is used to satisfy their consumption demands for goods and services. The interaction between individuals and firms occurs in two distinct arenas. First, there is a product market where goods and services are bought and sold. Second, there is a market for factors of production where labour, capital, and natural resources are traded. Subject Matter of Managerial Economics: Managerial Economics- also called Business Economics- is the application of economic theory and methodology to business. Business involves decision-making. Different aspects of business need the attention of the chief executive; he may be called upon to choose an option among the many open to him. For this purpose the executive has to decide upon various...
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