The Nature and Scope of Managerial Economics
• Managerial economics, meaning the application of economic methods in the managerial decisionmaking process, and it is a fundamental part of any business.
This is happening for several reasons
It is becoming more important for managers to make good decisions and to justify them, as their accountability either to management or to shareholders increases. Number and size of multinationals increases, the costs and benefits at stake in the decision-making process are also increasing. In the age of plentiful data it is more imperative to use quantitative and rationally based methods, rather than ‘intuition’.
The pace of technological development is increasing with the impact of the ‘new economy’. There is an increased need for economic analysis because of the greater uncertainty and the need to evaluate it. Improved technology has also made it possible to develop more sophisticated methods of data analysis involving statistical techniques. Modern computers are adept at ‘number-crunching’, and this is a considerable aid to decision-making that was not available to most firms until recent years.
What is Managerial Economics???
It is the integration of economic principles with business management practices It is essentially applied economics in the field of business management.
Definitions: Managerial Economics
• Integration of Economic theory with business practice for purpose of facilitating decision making and forward planning by management - Spencer & Siegelman • It is concerned with the application of economic concepts and economics to the problems of formulating rational decision making -Mansfield
Why do Managers need to know Economics?
• Economic theories contribute in building analytical models, which help to recognize the structure of managerial problems • Economic theories do enhance analytical capabilities of business analyst • They offer clarity to various concepts used in business analysis, which enables the managers to avoid conceptual pitfalls
Decision Problems faced by firms
• What should be the price of the product? • What should be the size of the plant to be installed? • How many workers should be employed? • What is the optimal level of inventories of finished products, raw material, spare parts, etc.? • What should be the cost structure?
Relationship between Economics & Management
Business Management Decision Problems
Managerial EconomicsApplication of Economics to solving business problems
Optimal Solutions to Business problems
Significance: Managerial Economics
• Reconciling traditional theoretical concepts in relation to the actual business behavior and conditions • Estimating economic relationships • Predicting relevant economic quantities • Formulating business policies and plans
Characteristics: Managerial Economics
• • • • Microeconomic in character Is Normative rather than positive in character It is prescriptive rather than descriptive Also uses Macroeconomics since it provides an intelligent understanding of environment
Scope: Managerial Economics
• Incorporate micro and macroeconomics to deal with business problems Microeconomics - micro means a small part Concerned with analysis of behavior of individual economic variables such as individual consumer or a producer or price of a particular commodity Macroeconomics - concerned with aggregate behavior of the economy as a whole
The Firm Environment
• Micro economics in character. • Uses eco. concepts like “Theory of the Firm” and “Profit Theory”. • Avoids abstract issues of eco. Theory but involves complications. • It is perspective than descriptive eg. Law of demand states that as price increases demand goes down but is it good or bad.
Involves application of economic principles to problems of the firm.
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