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MANAGERIAL ECONOMICS - INTRODUCTION ME consists of that part of economic theory
which helps the business manager to take rational decisions
Economic theory helps to analyse practical problems
ME integrates economic theory with business practice
ME bridges the gap between abstract theory and business practice
MANAGERIAL ECONOMICS – INTRODUCTION CTD…. Deals with the use of economic concepts and
principles for decision-making in a business Otherwise called Business Economics or
Economics of the Firm It is economics applied in decision-making So also called Applied Economics
MANAGERIAL ECONOMICSDEFINITION-SPENCER AND SIEGELMAN
The integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management
MANAGERIAL ECONOMICSSPENCER AND SIEGELMAN
Operational Issues- arise in the daily operation- issues that arise in relation
to implementation of plans already made
- day-to-day management of men and materials
- alterations and adjustments in plans made
MANAGERIAL ECONOMICS
SPENCER AND SIEGELMAN
Forward PlanningEstablishing plans for future regarding
production, pricing, capital, profit, raw materials, labour etc.
Needs forecast of future market situationsFuture is always uncertainThis uncertainty makes decision-making
difficultEconomic theories help to overcome this
difficulty
FORWARD PLANNING CTD…..
Economics provides tools to analyse market conditions, demand, supply
Also helps to understand external forces influencing business like business cycles, fluctuations in national income, government policies on taxation, foreign trade, labour relations, industrial licensing, price control etc.
CHARACTERISTICS OF MANAGERIAL ECONOMICS Micro-economic in nature Based on the theory of the firm Pragmatic-helps decision making Normative rather than positive-positive-
what is normative-what ought to be-ethical economics, prescriptive economics
Both conceptual and metrical Macro-economics is useful to managerial
economist Bridges the gap between pure theory and
practice
MANAGERIAL ECONOMICS-CHARACTERISTICS Both science and art Has a multi-disciplinary approach Helps to take operational decisions and
forward planning A social science Not an exact science
DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS
Traditional economics is the study of concepts, principles and theoretical aspects. Managerial economics deals with the application of economic theory for business decision-making
Economics includes both micro economics and macro economics whereas managerial economics is micro in character
DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…
Economics is both positive and normative science and managerial economics is only normative science
Economics deals with theoretical aspects only whereas managerial economics deals with practical aspects
DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…
Economics studies both individuals and firms whereas managerial economics is limited to firms
Economics considers only the economic aspects of a problem, whereas managerial economics considers economic and non-economic aspects
DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…
Economics deals with all the distribution theories , viz., rent, wages, interest and profit. Managerial economics mainly uses profit theory
Managerial economics is mainly concerned with the process of decision-making whereas decision-making is not a concern of economics
DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…
Scope of economics is very wide whereas the scope of managerial economics is narrow as it deals with only a branch of traditional economics
Economics is a very old subject whereas managerial economics is a new and developing subject which evolved only after the second world war
SCOPE OF MANAGERIAL ECONOMICS Demand Analysis Production Function Cost Analysis Pricing Policies Profit Management Capital Budgeting Inventory Management Linear Programming and Theory of
Games Environmental Issues
USES OF MANAGERIAL ECONOMICS Helps find answer to the following
questions:What to produce?What inputs and production techniques?How much output to produce and its priceSize and location of new plantWhen should an existing plant be replaced?How should the available capital be
allocated?How much for advertisement?-Effective
media?-When to advertise? etc.
USES OF MANAGERIAL ECONOMICS CNTD.. Helps build suitable tool-kit from
traditional economics Incorporates ideas from other subjects Estimates economic relationships Predicts relevant economic quantities Understanding various influencing
factorsExternal internal
USES OF MANAGERIAL ECONOMICS CNTD.. Basis of Business Policies Model Building Integrating Agent Helps meeting social obligations
ROLE OF A MANAGERIAL ECONOMIST To collect data To analyse economic trends To act as an advisor to the firm To forecast market trends
RESPONSIBILITY OF A MANAGERIAL ECONOMIST Maximisation of profit To make accurate forecasts To make changes in forecasts, if needed To keep the management informed of
economic trends Rapport with data sources Prove himself inevitable to the top
management
DECISION-MAKING Decision-making is a function of choice
A decision is needed only when there are two or more alternatives from which one is to be chosen
DEFINITION OF DECISION-MAKING Bayard O. Wheeler
Decision-making is the process of selecting a particular course of action from among a number of alternatives. As applied to business, a choice is made among alternative ways of using resources to accomplish predetermined objectives.
STEPS IN DECISION-MAKING Defining and analysing the problemOnly when the problem is analysed
properly, all the aspects of the problem can be understood
Identifying alternative solutionsA problem can be solved in different
waysHs to search for and identify each
possible solution or alternative
STEPS IN DECISION-MAKING CTD… Evaluating alternatives
The merits and demerits of each alternative must be studied
Selecting the best alternativeSelection depends on the cost of the alternatives, feasibility and constraints on them
STEPS IN DECISION-MAKING CTD… Communicating and implementing the decisionDecisions taken should be effectively communicated to those persons who are to implement them
STEPS IN DECISION-MAKING CTD… Follow-up
It helps to evaluate the effectiveness of the decision taken and implemented
Helps to revise the past decision, if needed or to make a better decision in future
TYPES OF BUSINESS DECISIONS Programmed and Non-programmed decisionsProgrammed decisions are of a routine nature
These decisions are taken for simple, common and frequently occurring problems
TYPES OF BUSINESS DECISIONS CTD… Programmed and Non-programmed decisionsThese decisions are taken on the basis of set procedures
These decisions are taken by lower level executives
TYPES OF BUSINESS DECISIONS CTD… Programmed and Non-programmed decisions ctd…Non-programmed decisions are highly important and unstructured
They are non-repetitive in nature
There is no standard procedure for handling such problems
TYPES OF BUSINESS DECISIONS CTD… Major and Minor decisions
Major decisions have direct bearing on the achievement of the goals of the concern and so these decisions are made very carefully
They are decided by top executives
Minor decisions are made in the course of execution of major decisions
TYPES OF BUSINESS DECISIONS CTD… Routine and Strategic decisionsRoutine decisions are for carrying out day-to-day activities
They have only a minor impact on the business
These decisions are made at middle and lower levels of management
TYPES OF BUSINESS DECISIONS CTD… Routine and Strategic decisions
ctd…Strategic decisions are of long-term nature and involve commitment of large funds
As these decisions affect the entire organisation, they are considered as basic decisions
They are taken by top level management
TYPES OF BUSINESS DECISIONS CTD… Individual and Group decisions
Individual decisions are taken on routine problems and there is an already set procedure to solve these problems
Group decisions are taken in the interest of the organisation as a whole
TYPES OF BUSINESS DECISIONS CTD… Analytical and Adaptive decisionsAnalytical decision is taken when the problem is complex but its output is certain
Adaptive decision is taken when the problem is complex but the output is uncertain
TYPES OF BUSINESS DECISIONS CTD… Mechanical and Judgemental decisionsMechanical decisions are applicable for simple problems the result of which are certain
Judgemental decisions are taken for simple problems the result of which are vague
TYPES OF BUSINESS DECISIONS CTD… Technical decisions
These decisions are pertaining to the production process
TYPES OF BUSINESS DECISIONS CTD… Managerial decisions
These are decisions connected with the integration and co-ordination of all the activities of an organisation to achieve the organisational goals
TYPES OF BUSINESS DECISIONS CTD… Institutional decisions
These are higher level decisions like expansion, diversification, issue of new shares, acquisition, mergers, closure of divisions etc.
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS All those economic concepts, theories and tools that can be used to analyse business environment and to take decisions on business problems come under the scope of managerial economics
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD.. Theory of Demand
It explains the consumer’s behaviour
It explains the why, how, when and how much of the demand of a product
The theory helps to understand the change in consumer behaviour when the price of the commodity, consumer’s income, taste and fashions change
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Theory of Production
Otherwise called theory of firmIt helps to understand the effect on average cost and marginal cost when the rate of production is varied
It examines how the total output increases when only one factor of production is increased or when all the factors are increased simultaneously
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Theory of Production ctd…
It also shows how much one factor of production can be substituted by another and how optimum and equilibrium points can be attained
The theory is of use in planning the size of the firm, volume of production and the proportion of the factors of production
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Price Theory
This theory is of use in determining the price policy of a firm
The theory explains how prices are determined under different market situations
It also helps to know how different prices can be charged for the same product in different markets
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…
Price Theory ctd…What price policy a new firm should pursue in a rather competitive market or a less competitive market
A successful price policy spells the future of any firm
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…
Theory of ProfitProfit theory helps in measuring, managing and planning future profit
It gives a guideline to calculate the required return on capital employed and in making allowances for risk element
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…
Theory of Capital and InvestmentA sound knowledge of capital theory helps in choosing investment proposals, efficient allocation of capital and the evaluation of the efficiency of the capital invested etc.
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…
Macroeconomic TheoriesThey help to understand the external factors that are beyond his control and to take suitable decisions
A business concern cannot survive unless it adjusts its decisions in accordance with external factors
ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Macroeconomic Theories ctd…
The businessman must know the macroeconomic theories like Theory of national IncomeTheories of economic growth and fluctuations
Theory of international trade and monetary mechanism
Government policies relating to taxation, labour relations etc.