Transcript Nature and Scope of Managerial Economics

Objectives of the Session
By the end of this session, it will be hoped to achieve
the following objectives;

To understand the nature and scope of managerial
economics

Able to introduce and define managerial economics,

To have understanding about the economic theory
and tools of decision sciences
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 to
explain the relationship between
managerial economics, economic theory,
decision sciences and functional areas of
business administration.
 To
discuss the importance of managerial
economics
Nature and Scope of Managerial
Economics
 Definition
of Managerial Economics
 Relationship
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
to other fields of Study
Relationship to the Economic Theory
Relationship to the Decision Sciences
Relationship to the Functional Areas of Business
Administration Studies
Definition of Managerial Economics

Salvatore defines as;
“Managerial economics refers to the application
of economic theory and the tools of analysis of
decision science to examine how an
organization can achieve its objectives most
efficiently.”

Douglas defines as;
“Managerial economics is the application of
economic principles and methodologies to the
decision-making process within the firm or
organization.”
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 It
can be seen as a means to an end by
managers, in terms of finding the most
efficient way of allocating their scarce
resources and reaching their objectives.
 As
an approach to decision-making,
managerial economics is related to economic
theory, decision sciences and business
functions.

This definition can be well explained with the help
of following diagram;
Management Decision Problems
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Examples;
A hospital may seek to treat as many patients as possible at
an adequate medical standard with its limited physical
resources (i.e. physicians, technicians, nurses, equipment,
beds etc.) and budget.

The goal of a state university may provide an adequate
education to as student as possible subject to the physical
and financial constraints it faces.

Similarly, a government agency may investigate to provide
a particular service to as many people as possible the
lowest feasible cost.
Relationship to Economic Theory

Economic theory seeks to predict and explain
economic behaviour. It begins with a model,
which is the abstract of many details surrounding
an event and seeks to identify a few of the most
important determinants of the event.

For example, economic theory assumes that firm
seeks to maximize profits, thus it predicts how
much of particular commodity the firm should
produce under different form of market structure.
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
Economic theory is mainly divided into microeconomics
and macroeconomics.

Microeconomics is the study of the economic behavior
of
individual
decision-making
units
–individual
consumers, resource owners, and business firms in an
economy.

Macroeconomics is the study of the total or aggregate
level of output, income, employment, consumption,
investment, and prices for the economy viewed as a
whole.
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The main branch of economic theory with which
managerial
economics
is
related
is
microeconomics. In particular, the following
aspects of microeconomic theory are relevant:
theory of the firm
theory of consumer behaviour (demand)
production and cost theory (supply)
price theory
market structure and competition theory
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There is one main difference between the
emphasis of microeconomics and that of
managerial economics:

the former tends to be descriptive, explaining
how markets work and what firms do in practice,

while the latter is often prescriptive, stating what
firms should do, in order to reach certain
objectives.
Relationship to Decision Sciences

The decision sciences provide
techniques of analysis used
economics.

Decision Sciences comprise
economics and econometrics.

Mathematical Economics expresses and analyzes
economic models using the tools of mathematics.

Econometrics employs statistical methods to
estimate and test economic models using empirical
data.
the tools and
in managerial
of
mathematical
Relationship to Functional Areas of
Business Administration
 Functional
areas
of
business
administration studies include accounting
and finance, marketing, human resource
management and production.
 These
disciplines study the business
environment in which the firm operates
and therefore the background for
managerial decision making.
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 For
example
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A production department may want to plan and
schedule the level of output for the next quarter,
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the marketing department may want to know what
price to charge and how much to spend on
advertising,

the finance department may want to determine
whether to build a new factory to expand capacity,
and
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 the
human resources department may want
to know how many people to hire in the
coming period and what it should be offering
to pay them.
 All
of these functional areas can apply the
theories and method in the context of the
particular situation and tasks that they have
to perform.
Conclusion
 Thus
managerial economics can be regarded
as an overview course that integrates economic
theory, decision sciences, and the functional
areas of business administration studies and
examines how they interact with one another as
the firm attempts to achieve its goal most
efficiently.
Basic process of decision making

It is important to note that the goals and
constraints may differ from case to case, however
the basic decision-making process is the same as
it can be divided into five basic steps;
1.
2.
3.
4.
5.
Define the problem.
Determine the objective
Identify possible solutions
Select the best possible solution
Implement the decision
Nature of Managerial Economics;
A further note

Managerial
character.

Managerial Economics largely uses that body of
economic concepts and principles, which is known
as 'Theory of the firm' or 'Economics of the firm'.
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Managerial Economics is pragmatic. It avoids
difficult abstract issues of economic theory but
involves complications ignored in economic theory
to face the overall situation in which decisions are
made.
Economics
is
micro-economic
in
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 Managerial
economics to a certain degree
is prescriptive in nature as it suggests
course of action to a managerial problem.
Scope of Managerial Economics

The scope of economics
understood with following;
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Demand and Supply analysis: It deals with
various aspects of demand and supply of a
commodity. Certain important aspects of
demand and supply analysis are demand and
supply schedules, curves and functions, law of
demand and supply and their limitations,
elasticity of demand and supply and factors
influencing demand and supply.
can
further
be
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Production analysis: microeconomic techniques
are used to analyse production efficiency, optimum
factor allocation, costs, economies of scale and to
estimate the firm's cost function.
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Pricing analysis: Pricing is a very important area of
Managerial Economics. In fact, the success of a
business firm largely depends on the correctness of
the prices decisions taken by it. The important
aspects dealt with under this area are :- Price
Determination in various Market Forms, Pricing
methods, Differential Pricing, Product-line Pricing
and Price Forecasting.
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Capital budgeting: Investment theory is used to
examine a firm's capital purchasing decisions
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Risk analysis: various uncertainty models, decision
rules, and risk quantification techniques are used to
assess the riskiness of a decision.
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 The
various aspects outlined above
represent the major uncertainties which a
firm has to face with, viz., demand
uncertainty,
cost
uncertainty,
price
certainty, profit uncertainty, and capital
uncertainty. It can, therefore, be concluded
that the subject matter of Managerial
Economics consists of applying economic
principles and concepts towards adjusting
with various uncertainties faced by a firm.
Importance of managerial economics

Managerial economics has been receiving more
attention in business as managers become more
aware of its potential as an aid to decision-making,
and this potential is increasing all the time. This is
happening for several reasons:
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It is becoming more important for managers to
make good decisions and to justify them, as their
accountability either to senior management or to
shareholders increases.
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As the number and size of multinationals
increases, the costs and benefits at stake in
the decision-making process are also
increasing.
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In the age of plentiful data it is more
imperative to use quantitative and rationally
based methods, rather than ‘intuition’.
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The pace of technological development is
increasing with the impact of the ‘new economy’.
There is no doubt that there is an increased need
for economic analysis because of the greater
uncertainty and the need to evaluate it.
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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.
Business Versus Economic Profit
 Business
Profit
 Economic
Profit