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Meaning of Managerial Economics:

According to spencer and Siegelman ME is the integration of economic theory with


business practice for the purpose of facilitating decision making and forward planning by
management.

According to Jeal Dean The purpose of ME is to how economic modes of thought to


analyse business situations.

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Economics can be broadly divided into 2 Categories:
Micro Economics- Studies the Behaviour of an individual and Decision making Economic unit
like a Firm, a Consumer or the Individual Supplier of some factor of Production.

Macro Economics-Studies the economic system in aggregate and it relates to issues such as
determination of national income, savings, investment, employment at aggregate levels, tax
collection, government expenditure, foreign trade, money supply, price Level etc
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In Simple terms Managerial Economics is applied Micro Economics which involves application of that
part of Micro Economics which is directly related to decision making by a Manager.
Thus Managerial Economics analyses the process through which a manager uses economic Theories
to address to complex problems of Business world and also take rational decisions to meet the goals
set by his or her firm.
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Characteristics/ Nature of Managerial Economics:
The basic characteristics of managerial economics can now be enumerated as

It is concerned with "decision making of an economic nature."

It is "micro-economic" in character.

It largely uses that body of economic concepts and principles which is


the firm."

It is "goal oriented and perspective".

Problem Solving in Nature

Managerial economics is both "conceptual and metrical". It includes theory with


measurement.

known as "theory of

Pragmatic- Practical subject in nature and it goes beyond theories

Positive to Normative Economics-

1. Positive Economics- Describes what is observed economic Phenomenon


2. Normative Economics- it talks about what ought to be.
Managerial Economics also talks about:

Demand Analysis: Law of Demand, Elasticity of Demand, Factors affecting demand etc

Production Analysis- Law of variable proportions, Law of Returns etc

Market Analysis- Different types of market conditions, pricing policies in different form of
markets.

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Like and Economy, the manager of a firm also faces five basic issues:
1. Choice of Product- which product to produce, avail and allocation of raw material to
maximise profits of the firm
2. Choice of Inputs- Decide on the input Mix which would produce the profit maximizing level
of output at minimum costs.
3. Distribution of the Firms Revenue- Here workers, owners of building, bankers, all those
contributed their material and services in the process of production, storage and
transportation, have to be paid according to the fixations previously decided as per terms
and conditions agreed upon. Now after all commitments are met the reminder amount is
the profit which has to be distributed among the owners of the firm after the payment of
any taxes.
4. Rationing of Resources for various Operations
5. Maintenance and Expansion-Managers need to plan strategies to ensure that the level of
output is maintained and also the efficiency of the firm be kept as well. Now Expansion of
Firm involves:

Mobilization of Funds

Procurement of Additional Resources

Now expansion is done with an intension of increasing scale of profits...But also associating Risk
Factors which has to be handled tactfully so that we meet our goals effectively.

Uses/ Objectives of Managerial Economics


It is useful for Decision Making in the Business.
In short, business Economics essentially implies the application of economic principles and
methodologies to the decision making process within the firm under the condition of
uncertainty.
Managerial Economics is a selection from the tool box of economic principles, methods and
analysis applied to business management and decision making, future planning as well.
Managerial Economics is useful for:

Problem Solving in Business

Improve the Quality and preciseness of decisions

It helps in arriving at quick and appropriate decisions

Business is useful in several areas of Business and Management such as Production


management, inventory management, marketing management, Financial management, HR,
and Knowledge management.
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Significance of ME:
The significance of ME can be listed as under:

Assists in Decision Making

Optimization of Resources

Creates Good working Environment

Relationship Building

Co-ordination Building

Scope of ME:

Demand Analysis and Forecasting

Cost and Production Analysis

Pricing decisions, policies and practices

Profit Management

Capital Management

Analysis of Business Environment

Allied Disciplines

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There are four groups of problem in both decision making and forward planning.

Resource allocation
Inventory and queuing problem
Pricing problems
Investment problems

Study of managerial economics essentially involves the analysis of certain major subjects like

Demand analysis and methods of forecasting

Demand Elasticity

Cost analysis

Pricing theory and policies

Profit analysis with special reference to break-even point

Pricing and Output Determination

Pricing policies and practices in real Business

Profit Planning and Management

Capital Budgeting and Management

Break Even Analysis

Linear Programming

Game Theory

Capital budgeting for investment decisions

The business firm and objectives

Competition.

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Uses of ME:

Used for integration of Economic Theory with business practice

Used as solution to practical Business problems

Optimum use of Scare Resources

Used for other objectives- attaining industry leadership, expansion of market share etc

Used for overall development

Used in making right decisions

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Circular Flow of Economic Activities


Economic analysis attempts to explain the working of economic systems. The economic activities
performed by economic agents are generally classified into 3 Inter related activities:
Supplying Factor Inputs- Land, Labour, Capital, Organisation and Enterprise which enables us
to make incomes which can be in-turn used to purchase other goods.
Using Factor Inputs
Providing Intangible and Specialized Services
We need to understand certain aspects before we move further with the topic:
Now here we need to understand the nature and Dimensions of the overall Economic
Development before we decide on the individual firms efficiency and Level of performance.
The Extent of Monetization and Foreign Trade also determine the nature and Scope of the
Economic activities in a Country.
The Extent of Government Intervention also plays a role in how firms works.
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Role and Responsibilities of Managerial Economist

Managerial Economists are also known as Business Economists, Company Economists or


Economic advisers.

He is a thinker and like a friend to business man. He will have a good knowledge of the
working of the individual firm, Industrial functioning and also the economy at large.

Managerial Economists act as Operations, Researchers and System analysts in the


management services of a large business firms.

Their job lies in designing the course of Operations to maintain and improve the systems of
the firm in terms of productivity, market share etc and also to prepare report to cope with
current and future problems.

Todays Business alternative choice of production is a major hurdle in decision making and
we need take rational decisions based on the suitability of the business operations and this
is where the economists comes into picture.

A managerial Economist is an Economic adviser and also plays a major role in various
decisions making of a firm which will decide on the survival, profitability and also future
growth of the firm in the long run.

The decisions may involve to nature of product to be produced, the quantity in which it is to
be produced, its quality, costing, price and also its distribution in the market, planning,
diversification of business, renewal of worn out equipments and machinery modernisation
etc. The Business economist helps management take right decision in these views.

They apply Quantitative and Quantitative Techniques and also consider to the practical
aspects and problems encountered by a business firms in its productive activity.

They measure a number of micro and macro variables in the decision making process. Now
forecasting is a fundamental activity. He deals with business problems in a deep analytical
way.

Managerial Economist also does the role or operation researcher and system analyst in the
large business operations.

A managerial Economist in a Business Firm carries on wide variety of duty in a business firm such as:

Demand Estimation and Forecasting

Preparing of business/ Sales Forecasting

Analysis of the market to determine the nature and extent of Competition

Analysing issues and problems of the concerned Industry

Assisting the Business planning process of the firm

Discovering new and possible fields of business endeavour and its cost benefit analysis as
well as feasibility studies

Advising on pricing, investment and capital budgeting policies

Evaluation of Capital budgets

They also play a crucial role in Building micro and macro-economic models for particular
aspects of the firms activities that are useful in solving specific business problem. Most
models may be prediction oriented.

Directing economic research activity

Briefing the management on current domestic and global economic issues and emerging
challenges. Interpretation, analysis and reporting of current economic matters, upcoming
developments in business, government and foreign or global sectors

The business economists need to understand and acquire full knowledge about the
behaviour of the economy and the impact of macro-economic policies such as monetary,
fiscal and industry, national and international affairs adopted by the government from time
to time in the growth of the business. This is because all business concerns are a part of the
economy and no business is outside is framework of the rules and regulations set by the
government.
Knowledge of balance of Payments position, exchange rates, import and export policies of
the government are also essential for a business economist. He also needs to understand
changes in the Technological innovations and tastes and preferences and guide business firm
accordingly where in costs can be still minimal.
He needs to co-ordinate in business planning, decision making and guide the organisation in
selecting the right plan of action.
He needs to guide the management in the procurement of funds which will not burden the
organisation heavily...ie selection the best source of fund procurement among all
alternatives. Capital budgeting and Budget control and project co-ordination is also role of
economists.
Business analyst also analyses cost benefit analysis on varies forms of investments helps in
making right future investments.
A business analyst role in a financial firm can be listed as:

Involving in stock market forecasting

Portfolio selection

Money Market projection

Compilation of key business indicators and to provide guidelines for investment,


marketing and speculative activities

In modern business he needs to analyse, generalize and make suitable recommendations. He must
be given freedom of giving judgements with regards to working and if any changes if found needed
be taken then and there. He must have right to criticise, discuss and make suggestions.

Hence we can know and understand the role, Importance and responsibilities of a Managerial
Economist very clearly.
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Relationship of Managerial Economics with Statistics:

Statistical tools are great aid in Decision making.

It is used in collection, processing and analysis of the data which will be mostly quantitative
expression of things.

Most Business Decisions are based on Economic event happenings. Example: Theory of
Probability, Forecasting Techniques etc.

The data is collected and using statistical tools analysis is made systematically.

It is used in Analysis of Decisions making, Risk Analysis, viability of the project, profitability
analysis and also taking the economic view point into account.

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Managerial Economics and Operation Research:
OR is the use of advanced mathematical techniques to improve decision making.
OR is useful in selection of best alternatives and right decisions can be taken at suitable time.
Example: Linear Programming is a good Example
It helps in taking sound decisions in real time business relevance.
Some

of

the

aspects

of

OR

used

in

real

time

business

operations

are:

Facility Planning

Scheduling

Planning and Forecasting

Yield Management

Credit Scoring- which is the best prospect of credit financing and also in deciding which
customer the best prospect for credit companies

Marketing- Evaluating sale, promotions, developing customer profile database to effectively


handle customers

Defence and Peace keeping

Computer simulation: Allows you to try out which approach is ideal given certain given
conditions are there in that given situations

Optimization

Problem Structuring

Relationship with Decision Theory:


A new decision is basically made when either an individual or an Organisation is not happy with the
present decisions and feels dissatisfied with the existing state and also there are a few alternatives
which are available to improve existing states.
Decision Theory which is defined as the process of logical and quantitative analysis of all factors that
influences the decision problem, assists the Decision Maker in analysing these problems with several
courses of action and consequences.
The basic objective of decision theory is to provide a method

Elements in Decision Making:

Decision Maker

Goals to be achieved

Preference or value system

Course of Action

States of Nature-Make of list of possible future events which might come into picture as a
result of the present decision...This will help us be better prepared for future uncertainty if
any

Payoffs- It is the effectiveness associated with a particular combination of course of action


and state of Nature. These are also known as conditional values or profits.

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Basic Process of Decision Making:
1.

Defining the problem

Clearly Define the Problem on Hand

List all the viable alternatives

2.

3.

Determining the objective:

Identify the expected future events

Construct a payoff table

Exploring the alternatives

4.

Predicting the consequences

5.

Making a choice

Select Optimum Decision Criterion

Performing sensitivity analysis

Construct a payoff table

Apply the model and make decision

6. Collect feedback make necessary changes if any required for effective business performance.
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Role of ME in Business Decision Making:

Production Decisions

Inventory Decisions

Cost Decisions

Marketing Decisions

Investment Decisions

Personnel Decisions

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Types of Decision Making Situations:
These are following decision making situations:

Decision making under risk

Decision making under uncertainty

Decision making under partial information

Decision making under Conflict-Here we anticipate the action of the opponent and we make
our own moves. This is found in Game Theory

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