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Note for Managerial Economics and Financial Analysis - MEFA By Shaik Mohammad

  • Managerial Economics and Financial Analysis - MEFA
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Managerial Economics & Financial Analysis Introduction To 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”. 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 behaviour 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 economics activity in a country is called macroeconomics. It studies the flow of economics 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 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 behaviour, 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. 1| Mohammad Imran Gates Intitute of Technology -Gooty

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Managerial Economics & Financial Analysis Management Management is the science and art of getting things done through people in formally organized groups. It is necessary that every organisation 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 goals, objectives, policies, and procedures; coordinates their efforts; motivates them to sustain their enthusiasm; and leads them to achieve the corporate goals. Managerial Economics Introduction Managerial Economics refers to the firm’s decision making process. It could be also interpreted as “Economics of Management” or “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. 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 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 of Managerial Economics Managerial economics is, perhaps, the youngest of all the social sciences. Since it originates from Economics, it has the basis features of economics, such as assuming that other things remaining the same (or the Latin equivalent ceteris paribus). This assumption is made to simplify the complexity of the managerial phenomenon under study in a dynamic business environment so many things are changing simultaneously. This set a limitation that we cannot really hold other things remaining the same. In such a case, the observations made out of such a study will have a limited purpose or value. Managerial economics also has inherited this problem from economics. Further, it is assumed that the firm or the buyer acts in a rational manner (which normally does not happen). The buyer is carried away by the advertisements, brand loyalties, incentives and so on, and, therefore, the innate behaviour of the consumer will be rational is not a realistic assumption. Unfortunately, there are no other alternatives to understand the subject other than by making such assumptions. This is because the behaviour of a firm or a consumer is a complex phenomenon. The other features of managerial economics are explained as below: 2| Mohammad Imran Gates Intitute of Technology -Gooty

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Managerial Economics & Financial Analysis (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 scope of managerial economics refers to its area of study. Managerial economics refers to its area of study. Managerial economics, Provides management with a strategic planning tool that can be used to get a clear perspective of the way the business world works and what can be done to maintain profitability in an ever-changing environment. Managerial economics is primarily concerned with the application of economic principles and theories to five types of resource decisions made by all types of business organizations. 3| Mohammad Imran Gates Intitute of Technology -Gooty

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Managerial Economics & Financial Analysis a. The selection of product or service to be produced. b. The choice of production methods and resource combinations. c. The determination of the best price and quantity combination d. Promotional strategy and activities. e. The selection of the location from which to produce and sell goods or service to consumer. The production department, marketing and sales department and the finance department usually handle these five types of decisions. The scope of managerial economics covers two areas of decision making a. Operational or Internal issues b. Environmental or External issues a. Operational issues: Operational issues refer to those, which wise within the business organization and they are under the control of the management. Those are: 1. Theory of demand and Demand Forecasting 2. Pricing and Competitive strategy 3. Production cost analysis 4. Resource allocation 5. Profit analysis 6. Capital or Investment analysis 7. Strategic planning 1. Demand Analyses and Forecasting: A firm can survive only if it is able to the demand for its product at the right time, within the right quantity. Understanding the basic concepts of demand is essential for demand forecasting. Demand analysis should be a basic activity of the firm because many of the other activities of the firms depend upon the outcome of the demand for cost. Demand analysis provides: 1. The basis for analyzing market influences on the firms; products and thus helps in the adaptation to those influences. 2. Demand analysis also highlights for factors, which influence the demand for a product. This helps to manipulate demand. Thus demand analysis studies not only the price elasticity but also income elasticity, cross elasticity as well as the influence of advertising expenditure with the advent of computers, demand forecasting has become an increasingly important function of managerial economics. 2. Pricing and competitive strategy: Pricing decisions have been always within the preview of managerial economics. Pricing policies are merely a subset of broader class of managerial economic problems. Price theory helps to explain how prices are determined under different types of market conditions. Competitions analysis includes the anticipation of the response of competitions the firm’s pricing, advertising and marketing strategies. Product line pricing and price forecasting occupy an important place here. 3. Production and cost analysis: Production analysis is in physical terms. While the cost analysis is in monetary terms cost concepts and classifications, cost-out-put relationships, economies and diseconomies of scale and production functions are some of the points constituting cost and production analysis. 4. Resource Allocation: 4| Mohammad Imran Gates Intitute of Technology -Gooty

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