Note for Managerial Economics and Financial Analysis - MEFA By chaitanya p

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[Type the document title] [Year] UNIT-I INTRODUCTION TO MANAGERIAL ECONOMICS Imagine for a while that you have finished your studies and have joined as an engineer in a manufacturing organization. What do you do there? You plan to produce maximum quantity of goods of a given quality at a reasonable cost. On the other hand, if you are a sale manager, you have to sell a maximum amount of goods with minimum advertisement costs. In other words, you want to minimize your costs and maximize your returns and by doing so, you are practicing the principles of managerial economics. Managers, in their day-to-day activities, are always confronted with several issues such as how much quantity is to be supplied; at what price; should the product be made internally; or whether it should be bought from outside; how much quantity is to be produced to make a given amount of profit and so on. Managerial economics provides us a basic insight into seeking solutions for managerial problems. Managerial economics, as the name itself implies, is an offshoot of two distinct disciplines: Economics and Management. In other words, it is necessary to understand what these disciplines are, at least in brief, to understand the nature and scope of managerial economics. Introduction to 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”. It was only during the eighteenth century that Adam Smith, the Father of Economics, defined economics as the study of nature and uses of national wealth’. Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes “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”. Thus, it is one side, a study of wealth; and on the other, and more important side; it is the study of man. As Marshall observed, the chief aim of economics is to promote ‘human welfare’, but not wealth. The definition given by AC Pigou endorses the opinion of Marshall. Pigou defines Economics as “the study of economic welfare that can be brought directly and indirectly, into relationship with the measuring rod of money”. Lava Kumar V, Assistant professor Page 1

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[Type the document title] [Year] Prof. Lionel Robbins defined Economics as “the science, which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. With this, the focus of economics shifted from ‘wealth’ to human behaviour’. Lord Keynes defined economics as ‘the study of the administration of scarce means and the determinants of employments and income”. Microeconomics The study of an individual consumer or a firm is called microeconomics (also called the Theory of Firm). Micro means ‘one millionth’. Microeconomics deals with behavior and problems of single individual and of micro organization. Managerial economics has its roots in microeconomics and it deals with the micro or individual enterprises. It is concerned with the application of the concepts such as price theory, Law of Demand and theories of market structure and so on. Macroeconomics The study of ‘aggregate’ or total level of economic activity in a country is called macroeconomics. It studies the flow of economics resources or factors of production (such as land, labor, capital, organization and technology) from the resource owner to the business firms and then from the business firms to the households. It deals with total aggregates, for instance, total national income total employment, output and total investment. It studies the interrelations among various aggregates and examines their nature and behavior, their determination and causes of fluctuations in the. 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 payment, theories of employment, and so on. Though macroeconomics provides the necessary framework in term of government policies etc., for the firm to act upon dealing with analysis of business conditions, it has less direct relevance in the study of theory of firm. Management Management is the science and art of getting things done through people in formally organized groups. It is necessary that every organization be well managed to enable it to achieve its desired goals. Management includes a number of functions: Planning, organizing, staffing, directing, and controlling. The manager while directing the efforts of his staff communicates to them the Lava Kumar V, Assistant professor Page 2

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[Type the document title] [Year] goals, objectives, policies, and procedures; coordinates their efforts; motivates them to sustain their enthusiasm; and leads them to achieve the corporate goals. Welfare Economics Welfare economics is that branch of economics, which primarily deals with taking of poverty, famine and distribution of wealth in an economy. This is also called Development Economics. The central focus of welfare economics is to assess how well things are going for the members of the society. If certain things have gone terribly bad in some situation, it is necessary to explain why things have gone wrong. Prof. Amartya Sen was awarded the Nobel Prize in Economics in 1998 in recognition of his contributions to welfare economics. Prof. Sen gained recognition for his studies of the 1974 famine in Bangladesh. His work has challenged the common view that food shortage is the major cause of famine. In the words of Prof. Sen, famines can occur even when the food supply is high but people cannot buy the food because they don’t have money. There has never been a famine in a democratic country because leaders of those nations are spurred into action by politics and free media. In undemocratic countries, the rulers are unaffected by famine and there is no one to hold them accountable, even when millions die. Welfare economics takes care of what managerial economics tends to ignore. In other words, the growth for an economic growth with societal upliftment is countered productive. In times of crisis, what comes to the rescue of people is their won literacy, public health facilities, a system of food distribution, stable democracy, social safety, (that is, systems or policies that take care of people when things go wrong for one reason or other). Managerial Economics Introduction Managerial Economics as a subject gained popularity in USA after the publication of the 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”. As Joel Dean observes managerial economics shows how economic analysis can be used in formulating polices. Lava Kumar V, Assistant professor Page 3

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[Type the document title] [Year] Meaning & Definition: In the words of E. F. Brigham and J. L. Pappas Managerial Economics is “the applications of economics theory and methodology to business administration practice”. Managerial Economics bridges the gap between traditional economics theory and real business practices in two ways. 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. C. I. Savage & T. R. Small therefore believes that managerial economics “is concerned with business efficiency”. M. H. Spencer and Louis Siegelman explain the “Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”. It is clear, therefore, that managerial economics deals with economic aspects of managerial decisions of with those managerial decisions, which have an economics contest. Managerial economics may therefore, be defined as a body of knowledge, techniques and practices which give substance to those economic concepts which are useful in deciding the business strategy of a unit of management. Managerial economics is designed to provide a rigorous treatment of those aspects of economic theory and analysis that are most use for managerial decision analysis says J. L. Pappas and E. F. Brigham. Managerial Economics, therefore, focuses on those tools and techniques, which are useful in decision-making. Lava Kumar V, Assistant professor Page 4