Unit I: Nature & Scope of Managerial Economics Fundamental Concepts of Economics Opportunity Cost: Discounting principle Time perspective

Incremental reasoning Equi-marginal concept Marginal concept Economics of information Risk, uncertainty, asymmetry of information Adverse selection Market signaling Theory of the firm Econometric models and optimization

Basic economics concepts

Basic economics The figure shows, in simplified form, the relationship between the three main parties in an economy: businesses, households and the government. Businesses produce goods and services; they sell these to the government and to households. Businesses and households pay taxes to the government and, in return, businesses may receive subsidies whilst households receive benefits such as unemployment benefits, pensions etc. Households provide factors of production, such as labour, to businesses and in return are paid wages etc. They use this money to buy goods and services from businesses. The diagram does not show the full complexities of the economy. Neither does the figure show external forces such as foreign businesses which compete with domestic producers to sell goods to domestic households, which are imports. In turn, businesses sell goods abroad to foreign businesses and households, i.e. exports. Economics Economics is the study of how society allocates scarce resources and goods. Resources are the inputs that society uses to produce output, called goods. Resources include inputs such as labour, capital, and land. Goods include products such as food, clothing, and housing as well as services such as those provided by barbers, doctors, and banks. These resources and goods are considered scarce because of society's tendency to demand more resources and goods than are available. In other words, economics is the study of how the resources land, labour, capital and enterprise are used or allocated by a country to meet its demands for goods, services and ideas, now and in the future. The resources are employed by businesses or firms and are also known as inputs to the production process, or factors of production. Microeconomics: Micro means small, so microeconomics looks at an individual business and how it behaves. It also looks at individual industries such as the car industry or the television industry and how businesses within them behave, although these industries can be country wide or global. The focus of microeconomics is on issues such as the demand by consumers for goods and services; the supply of such goods and services by businesses; the determination of prices by the interaction of demand and supply in a market; the costs which firms incur in producing and the implications for the level of production and the pricing of their output and how businesses behave in an industry. Macroeconomics: Macro means large and macroeconomics analyses the economy as a whole, both nationally and internationally. This includes the exploration of key variables or concepts such as inflation, unemployment, economic growth, trade flows, rates of exchange and the balance of payments, and their impact on each other and on the economy as a whole. It also examines the role of government, and its policies to influence these variables and, hence, the performance of the economy as a whole. Managerial Economics Managerial economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision." It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, calculus. If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by

scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions and other computational methods. Managerial decision areas include: Assessment of funds for investment Selecting business area Choice of product Determining optimum output Determining price of product Determining input-combination and technology Sales promotion Almost any business decision can be analysed with managerial economics techniques, but it is most commonly applied to: Risk analysis: Various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk. Production analysis: Microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs and economies of scale and to estimate the firm's cost function. Pricing analysis: Microeconomic techniques are used to analyse various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method. Capital budgeting: Investment theory is used to examine a firm's capital purchasing decisions. Issues Fundamental to Business Economics A business must use its resources as efficiently as possible since they are limited in supply and there are costs in acquiring and using them. These include employees known as labour, machinery and buildings (known as fixed capital), and the land on which the buildings stand. Businesses also have the expertise of their top managers who put the labour, capital and land together to produce the finished products most efficiently. Their purpose, amongst other things, is to ensure the business is profitable and that it grows. If losses are sustained over time, the business will close. Investing money (known as working capital) in new capital, products and ways to produce them is important if a business is to make maximum profits and grow. Products must be priced competitively, be of good quality, imaginatively designed, marketed effectively and distributed as efficiently and cheaply as possible if customers are to demand them. A business must have long term plans to achieve its objectives. Maximising profits will also be a long term objective. To promote the business objectives and respond to challenges from competitors and from the business environment in which they operate. Developments in the economy will impact significantly on a businesss operations. Definitions of Managerial Economics McGutgan and Moyer: Managerial economics is the application of economic theory and methodology to decision-making problems faced by both public and private institutions. McNair and Meriam: Managerial economics consists of the use of economic modes of thought to analyse business situations. Spencer and Siegelman: Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management. Opportunity Cost: Discounting principle Time perspective Incremental reasoning Equi-marginal concept Marginal concept Economics of information Risk, uncertainty, asymmetry of information Adverse selection Market signaling Theory of the firm Econometric models and optimization