1 1 Chapter 1 Introduction to Managerial Economics Unit Structure 1.0 Objectives 1.1 Introduction 1.2 Meaning of Managerial Economics 1.3 Need of Managerial Economics 1.4 Subject Matter of Managerial Economics 1.5 Ambiguity in the use of term 1.6 Interpretations of Managerial Economics from various universities 1.7 Definitions of Managerial Economics 1.8 Nature and Characteristics of Managerial Economics 1.9 Scope of Managerial Economics 1.10 The Nature of Managerial Decision-Making 1.11 Managerial Decision Making Process 1.12 Managerial Economist :Role and Responsibilities 1.13 Economic Theory in Business Practice 1.14 Summary 1.15 Questions 1.0 Objectives • To acquaint the students with concepts and techniques used in economics. • To study the meaning Of Economics and Managerial Economics. • To study the changes in the nature of business firms in the context of management of services and Globalization. • To explain the nature and interrelations between Managerial economics and other branches of Social sciences.
2 • To study how a business Manager makes decisions based on Economic theory & methodology. • To study the method of managerial economist’s method of solving economic problems through different types of economic systems • To understand the application of economic theories in business practices. 1.1 Introduction Economics is concerned with the study of the allocation of resources among competing ends. Problems of resource allocation are constantly faced by individuals, enterprises & nations. Over the years, the science of economics has developed a variety of concepts & analytical tools to deal with such allocation problems. Managerial economics (sometimes referred to as business economics), may be viewed as economics applied to problem solving at the level of the firm. The problems relate to the choices & allocation of resources , which are basically economic in nature & are faced by the managers all the time. The applied bias of managerial economics implies that the focus of the subject is an identifying solving the decision problems faced by the manager in a given enterprise situation and not merely on explaining his behaviour or theorizing about firm level phenomena. As a result , managerial economics though rooted in economic theory, draws upon and interact with other related disciplines. 1.2 Meaning of Managerial Economics Managerial economics is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrange calculus (linear). If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for example through the use of operations research and programming. Managerial economics, meaning the application of economic methods in the managerial decision-making process, is a fundamental part of any business or management course. Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to: • Risk analysis : various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
3 • Production analysis : microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm’s cost function. • Pricing analysis : microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method. • Capital budgeting : Investment theory is used to examine a firm’s capital purchasing decisions. At universities, the subject is taught primarily to advanced undergraduates and graduate business schools. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. 1.3 Need of Managerial Economics It 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: 1 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. 2 As the number and size of multinationals increases, the costs and benefits at stake in the decision-making process are also increasing. 3 In the age of plentiful data it is more imperative to use quantitative and rationally based methods, rather than ‘intuition’. 4 The pace of technological development is increasing with the impact of the ‘new economy’. Although the exact nature of this impact is controversial, there is no doubt that there is an increased need for economic analysis because of the greater uncertainty and the need to evaluate it. 5 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.
4 Thus, Managerial / Business economics is that part of economic theory which focuses on business enterprises and inquires into the factors contributing to the diversity of organizational structures and to the relationships of firms with labour, capital and product markets. Check your progress : 1. What is Managerial Economics ? 2. What are the areas managerial economics deal with? 3. To which areas managerial economics can be applied ? 1.4 Subject Matter of Managerial Economics Managerial / Business Economics is concerned with economic issue and problems related to business organization, management and strategy. Issues and problems such as the following : • an explanation of why firms emerge and exist; • why they expand: horizontally, vertically and specially; • the role of entrepreneurs and entrepreneurship; • the significance of organizational structure; • the relationship of firms with employees, the employees, the providers of capital, the customers, the government; • the interactions between firms and the business environment. 1.5 Ambiguity in the use of term The term Managerial Economics is used in a variety of ways. Sometimes it used as synonymously with - Industrial Economics - Industrial organization. Managerial Economics - Economics for Business. Industrial Economics is the mostly closely over-lapping of these terms whilst there may be more substantial differences with Economics for Business and Managerial Economics. One view of the distinctions between these would be that Business Economics is wider in its scope than Industrial Economics in that it would be concerned not only with “Industry” but also businesses in the service sector and that it also takes seriously the insights of the “business strategy” literature. Economics for business looks at the major principles of economics but focuses on applying these economic principles to the real world of business. Managerial economics is the application of economic methods in the managerial decision-making process.