Managerial Economics

Topics: Economics, Monopoly, Perfect competition Pages: 6 (807 words) Published: July 2, 2013
Concepts and Models of managerial economics

The discipline of managerial economics deals with aspects of economics and

tools of analysis, which are employed by business enterprises for decision-making.

Business and industrial enterprises have to undergo various decisions that entail

managerial issues and decisions. Decision-making can be delineated as a process

where a particular course of action is chosen from a number of alternatives. This

demands an unclouded perception of the technical and environmental conditions,

which are integral to decision making. The decision maker must possess a thorough

knowledge of aspects of economic theory and its tools of analysis. The basic

concepts of decision-making theory have been culled from microeconomic theory

and have been furnished with new tools of analysis. Statistical methods, for

example, are pivotal in estimating current and future demand for products.

The methods of operations research and programming proffer scientific criteria for

maximising profit, minimising cost and determining a viable combination of

products. Decision-making theory and game theory, which recognize the

conditions of uncertainty and imperfect knowledge under which business managers

operate, have contributed to systematic methods of assessing investment


Managerial economics draws on a wide variety of economic concepts, tools

and techniques in the decision-making process. These concepts can be categorized

as follows: (1) the theory of the firm, which explains how businesses make a variety

of decisions; (2) the theory of consumer behavior, which describes the consumer's

decision-making process and (3) the theory of market structure and pricing, which

describes the structure and characteristics of different market forms under which

business firms operate. A firm can be considered an amalgamation of people,

physical and financial resources and a variety of information. Firms exist because

they perform useful functions in society by producing and distributing goods and

services. In the process of accomplishing this, they employ society's scarce

resources, provide employment and pay taxes. If economic activities of society can

be simply put into two categories- production and consumption- firms are

considered the most basic economic entities on the production side, while

consumers form the basic economic entities on the consumption side. The

behavior of firms is usually analyzed in the context of an economic model, which is

an idealized version of a real-world firm. The basic economic model of a

business enterprise is called the theory of the firm.

A firms profit maximizing output decisions take into account the market

structure under which they are operate. There are four kinds of market

organizations: perfect competition, monopolistic competition, oligopoly and

monopoly. Perfect competition and monopoly are two extremes of market

situations. Other forms of market such as oligopoly and monopolistic competition

fall in between these two extremes. Oligopoly and monopolistic competition are the

market situations characterized by imperfect competition. The term ‘Monopoly’

has been derived from Greek term ‘Monopolies’ which means a single seller. Thus,

monopoly is a market condition in which there is a single seller of a particular

commodity who is called monopolist and has complete control over the supply of

his product. Pure monopoly rarely exists in reality. It is merely a theoretical

concept, because even if there were no close substitutes, some kind of competition

would always be there, such as a choice between decorating a house or buying a

car. However, even though pure monopolies are a rare phenomenon in developed

countries, they are found in developing countries like India in the form of State...
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