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Note for Managerial Economics and Financial Analysis - MEFA By Rajasekhar Kammari

  • Managerial Economics and Financial Analysis - MEFA
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www.alljntuworld.in JNTU World  It studies the flow of economic resources or factors of production (such as land, labour, capital, organisation and technology) from the resource owner to the business firms and then from the business firms to the households.  It deals with the total aggregates. For instance, total national income, total employment, total output and total investment. or ld  It studies the interrelations among various aggregates and examines their nature and behaviour, their determination and causes of their fluctuations in them.  It deals with the price level in general, instead of studying the prices of individual commodities.  It is concerned with the level of employment in the economy.  It discusses aggregate consumption, aggregate investment, price level and national income. W  The important tools of macro economics include national income analysis, balance of payments and theories of employment and so on. INTRODUCTION TO MANAGERIAL ECONOMICS  Managerial Economics as a subject gained popularity in USA after the publication of book “Managerial Economics” by Joel Dean in 1951. TU  Managerial Economics refers to the firm’s decision making process.  It could be also interpreted as “Economics of Management”.  Managerial Economics is also called as “Industrial Economics” or “Business Economics”. JN  Joel Dean observes managerial economics shows how economic analysis can be used in formulating policies. DEFINITIONS OF MANAGERIAL ECONOMICS 1. M.H.SPENCER AND L. SIEGELMAN Managerial Economics defined as “the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”. 2. BRIGHAM AND PAPPAS believe that managerial economics is “The application of economic theory and methodology to business administration practice”. JNTU World

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www.alljntuworld.in JNTU World 3. C.I.SAVAGE AND T.R.SMALL therefore believes that managerial economics is concerned with business efficiency. 4. HAGUE observes that or ld “Managerial Economics is a fundamental academic subject which seeks to understand and to analyse the problems of business decision-making”. 5. In the words of PAPPAS AND HIRSHEY “Managerial Economics applies economic theory and methods to business and administrative decision-making. Because it uses the tools and techniques of economic analysis to solve managerial problems, managerial economics links traditional economics with decision sciences to develop important tools for managerial decision-making”. 6. MICHAEL R.BAYE defines W  Managerial Economics as “the study of how to direct scarce resources in a way that most efficiently achieves a managerial goal”. 7. HAYNES, MOTE AND PAUL define Managerial Economics as “economics applied in decision-making. They consider this as a bridge between the abstract theory and the managerial practice”. Managerial Economics, therefore, focuses on those tools and techniques, which are useful in decision-making. TU MANAGERIAL ECONOMICS: Managerial Economics refers to the firm’s decision making process. It could be also interpreted as “Economics of Management”. Managerial Economics is also called as “Industrial Economics” or “Business Economics”. JN Managerial Economics bridges the gap between traditional economics theory and real business practices in two days. First it provides a number of tools and techniques to enable the manager to become more competent to take decisions in real and practical situations. Secondly it serves as an integrating course to show the interaction between various areas in which the firm operates. NATURE / CHARACTERISTICS OF MANAGERIAL ECONOMICS JNTU World

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www.alljntuworld.in JNTU World JN TU W or ld (a) Close to microeconomics: Managerial economics is concerned with finding the solutions for different managerial problems of a particular firm. Thus, it is more close to microeconomics. (b) Operates against the backdrop of macroeconomics: The macroeconomics conditions of the economy are also seen as limiting factors for the firm to operate. In other words, the managerial economist has to be aware of the limits set by the macroeconomics conditions such as government industrial policy, inflation and so on. (c) Normative statements: A normative statement usually includes or implies the words ‘ought’ or ‘should’. They reflect people’s moral attitudes and are expressions of what a team of people ought to do. For instance, it deals with statements such as ‘Government of India should open up the economy. Such statement are based on value judgments and express views of what is ‘good’ or ‘bad’, ‘right’ or ‘ wrong’. One problem with normative statements is that they cannot to verify by looking at the facts, because they mostly deal with the future. Disagreements about such statements are usually settled by voting on them. (d) Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the objectives of the firm, it suggests the course of action from the available alternatives for optimal solution. If does not merely mention the concept, it also explains whether the concept can be applied in a given context on not. For instance, the fact that variable costs are marginal costs can be used to judge the feasibility of an export order. (e) Applied in nature: ‘Models’ are built to reflect the real life complex business situations and these models are of immense help to managers for decision-making. The different areas where models are extensively used include inventory control, optimization, project management etc. In managerial economics, we also employ case study methods to conceptualize the problem, identify that alternative and determine the best course of action. (f) Offers scope to evaluate each alternative: Managerial economics provides an opportunity to evaluate each alternative in terms of its costs and revenue. The managerial economist can decide which is the better alternative to maximize the profits for the firm. (g) Interdisciplinary: The contents, tools and techniques of managerial economics are drawn from different subjects such as economics, management, mathematics, statistics, accountancy, psychology, organizational behaviour, sociology and etc. (h) Assumptions and limitations: Every concept and theory of managerial economics is based on certain assumption and as such their validity is not universal. Where there is change in assumptions, the theory may not hold good at all. SCOPE OF MANAGERIAL ECONOMICS The main focus in managerial economics is to find an optimal solution to a given managerial problem, the problem may related to production, reduction or control of cost, JNTU World

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www.alljntuworld.in JNTU World The main Areas of Managerial Economics 1. Demand Decision: or ld determination of price of a given product or service, make or decisions, inventory decisions, capital management or profit planning and management, investment decisions or human resource management. While all these are the problems, the managerial economics makes use of the concepts, tools and techniques of economics and other related discipline to find an optimal solution to a given managerial problem.  The analysis and forecasting of demand for a given product and service is the first task of the managerial economist.  The behavioural implications such as the needs of the customers responses to a given change in the price or supply are analysed in a scientific manner. W  The impact of changes in prices, income levels and prices of alternative products / services are assessed and accordingly the decisions are taken to maximise the profits.  Demand at different price levels at different points of time ias forecast to plan the supply accordingly and initiate changes in price, if necessary, to enlarge the customer base and gain more profits. TU  Determination elasticity of demand and demand forecasting constitute the strategic issues that the managerial economist handles in a scientific way. 2. Input-Output Decision:  Here, the costs of inputs in relation to output are studied to optimise the profits.  Production function and cost function are estimated given certain parameters.  The behaviour of costs at different levels of production is assessed here. JN  some costs are fixed, some are semi-variable and others are perfectly variable.  The quantity of production increases remains constant or decreases with additional increase in outputs.  This decision deals with changes in the production following changes in inputs which could be substitutes or complementary.  The entire focus of this decision is to optimise(maximise) the output at minimum cost. JNTU World

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