What is managerial Economics?

Mangerial economics is the application of economic tools and techniques to business and
administrative decision making
The main objectives of Managerial economics are:
To learn the usefulness of economics
in describing managerial behavior.
to improve managerial decisions.
to understand vital role of business in society.
sefulness of managerial economics
!i)Evaluating the alternative choices
"y linking the economic concepts to quantitavve methods# the managers can evaluate various
alternatives and take the most appropriate decision. $ince both the human and material
resources are scarce and limited one has to take the decision for the use of the best
combinations.
%ny problem in respect of production#pricing# labour# ra&materials# investmenant#
organisational strategy etc can be solved most efficiently for achiving the optimal solution
to the management decisions. %ll these can be solved &ith the help of economic concepts
and quantitative methods
$teps for such evaluation:
'dentify &ays to efficiently achieve goals.
$pecify pricing and production strategies.
$pell out production and marketing rules to ma(imi)e profits.
Hence managerial economics has a sigificant role in the managers decision making
process.
(ii) Making the Best Decision
'n order to take appropriate decision# the managers are required to understand the economic
environment in &hich they operate.
Managerial economics helps meet management objectives efficiently by applying the
economic theory and methodology to
decision making.
Managerial economics describes the logic of pricing practices for ma(imising profits.
Mostly &e &ill deal &ith the business applications.
*or the successful business# the managers need to adopt a set of principles &hich is
popularly kno&n as busness ethics. They are are follo&s:
Above all else, keep your word. Say what you mean and mean what you say.
Do the right thing. A handshake with an honorable person is worth more than a ton of legal
documents from a corrupt individual.
Accept responsibility for your mistakes and fix them. Be quick to share the credit for
success.
eave something on the table. !rofit with your customer not off your customer.
Stick by your principles. !ricniples are not for sale at any price.
+ole of "usiness in society:
The aim of business is not only to ma(imise profit but also it aims at fulfilling some social
responsibility. These
are:
satisfying consumer &ants.
contributing to social &elfare
$erving the customers.
,roviding employment opportunities.
-beying la&s and regulations of the government.
-n the one hand the main objectives of the business to ma(imise profit and on the other
hand it has to move &ith the society in fulfilling the overall social &elfare. The firm has to
operate in the conte(t of economic model to achieve this objective.
The business needs to be induced to move to&ards the directions that society desires. *or this
it is necessary to kno& the consumer.s demand#producers supply#market environment#
product quality# level of competition in the market# pricing strategy# organisational strategy
etc. %lso it has to deal &ith the political pressure or regulations of the govt etc.
/ence the firm has to keep close relationship &ith the society in respect to above issues to
achive the social objectives &ithout foregoing the main goal of business.
/o& the firm serves the customers and society?
*irm has to establish the realtionship &ith suppliers# investors# &orkers# and management jointly to
serve the customers and the society. This &ill be mainatained by estimating the e(pected value
ma(imisation in terms of optimisation of profits keeping in vie& the uncertainty and time value
of money.
/o& is it done? 't can be done by estimating the present value of firm s expected net cash flo
!future profits0.
!f " is the profit# the present alue of future e(pected profits &ill be:
n
$ "% &'i
t
t12
t1time # i 1discount rate# n1 no. of years!time0
,rofit is the total revenue minus the total cost: T+3T4.
4onstraints of theory of firms:
+esource constraint: /uman and material
-ther constarints: legal# and such others
5imitations of the theory of firms:
%l&ays it is not possible to optimise the business profit. /ence it is untenable to
assume optimisation of profit under the theory of firms.
Manytimes the cost of finding the best solution is higher than its benefits. /ence the mangers
in this case seek for satisfactory rather optimal results.
Measuring the profit of the firm6business
Business (ersus Economic )rofit
i. "usiness !accounting0 profit reflects e(plicit costs and revenues.
ii. Economic profit.
+eflects the implicit cost &hich 4onsiders cash
and non3cash items.
7o profits vary among fims? There are &ide variations in profits of the firms.
Why do they vary?
't is on account of une(pected gro&th in revenue and cost savings.
,rofits vary among firms because of differences in competions among different
firms.
Throughout the managerial economics the follo&ing main topics &ill be covered:
7emand and supply
,roduction and 4ost concepts
Theory of the firm#its objectives# constraints etc.
Marketing structure and its behaviour
8ame theory and its application in "usiness
Ecnomic -ptimisation process
What is optimal decision? 't is the best decision of the mangers &hich is consistent &ith the
mangerial objectives
Ma(imi)ing the 9alue of the *irm by fuilfilling the need of the customers most efficiently
Managers need to be more cusomers focused rather than involving &ith self interest
+evenue 4oncepts
,rice and quantity relation ,
%+
: M+
*otal +evenue 1 ,rice :uantity
Marginal +evenue:4hange in total revenue associated &ith
a one3unit change in output.
Maximi,ation of total +evenue : M+ 1 ;.
-ost -oncepts
*otal -ost1 *i(ed 4ost < 9ariable 4ost.
Marginal -ost is the change in total cost associated &ith a one3unit change in output.
.verage -ost 1 Total 4ost6:uantity %verage 4ost is Minimum &hen: M4 1 %4. 't
reflects efficient production of a given output level.
4oncepts of ,rofit
*otal )rofit : Total +evenue 3 Total 4ost
Marginal )rofit: change in total profit due to a one3
unit change in output: "# "$. 't is the gain from
producing one more unit of output !:0.
)rofit Maximi,ation: "# "$ % ; or "# % "$
!ncremental profits: 't is the gain tied to a given managerial decision# possibly involving
multiple units of :.
The incremental revenue of a ne& productis measured as the difference bet&een the firms
total revenue before and after the ne& product is introduced. $o also the incremental cost.
%ccordingly one can estimate the incremental profit.
Decision making process
Table
Legal and social
constraints
Esta/lishing o/0ective
Defining the pro/lem
!dentif1ing possi/le
alternative solutions
Evaluating alternative
courses of action
Of the alternative courses of
action, choosing the bst
Considering financial, techn
o
Legal
and
soci
al
cons
train
ts
Esta/li
shing
o/0ecti
ve
Definin
g the
pro/le
m
!dent
if1ing
possi/
le
altern
ative
soluti
ons
Evalua
ting
alter
nati
ve
cour
ses
of
actio
n
Of the
alternati
ve
courses
of
action,
choosing
the best
Considering
financial,
technological
,
infrastructure
and output
constraints
!mplementing and monitoring the decision