Note for Managerial Economics and Financial Analysis - MEFA By JNTU Heroes

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UNIT-I INTRODUCTION TO MANAGERIAL ECONOMICS & DEMAND ANALYSIS ECONOMICS Economics is a study of human activity both at individual and national level. The economists of early age treated economics merely as the science of wealth. The reason for this is clear. Every one of us in involved in efforts aimed at earning money and spending this money to satisfy our wants such as food, Clothing, shelter, and others. Such activities of earning and spending money are called “Economic activities”. According to Adam Smith “Economics as the study of nature and uses of national wealth”. According to Dr. Alfred Marshall “Economics is a study of man’s actions in the ordinary business of life: it enquires how he gets his income and how he uses it”. MICRO AND MACRO ECONOMICS Micro Economics  The study of an individual consumer or a firm is called Micro Economics. It is also called the theory of Firm.  Micro means one millionth. Micro Economics deals with behaviour and problems of single individual and of micro organisation. Managerial Economics  Managerial Economics has its roots in micro economics and it deals with the micro or individual enterprises.  It is concerned with the application of concepts such as Price Theory, Law of Demand and Theories of market structure and so on. Macro Economics  The study of aggregate or total level of economic activity in a country is called Macro Economics.

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 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.  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.  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.  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”.  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”.

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3. C.I.SAVAGE AND T.R.SMALL therefore believes that managerial economics is concerned with business efficiency. 4. HAGUE observes that “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  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. 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”. 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

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(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,