In simple terms, managerial economics can be taken as applied micro- Mote V.L., Samuel Paul and G.S. Gupta, Managerial Economics Concepts and. Relationship of Managerial Economics with other Disciplines Mote, Paul & Gupta: Managerial Economics – Concepts & Cases, Tata Thus the maximisation of the goal of balanced growth (maximise g = gd = gs) is that by jointly. Yogesh Maheswari, Managerial Economics, Phi Learning,. Newdelhi, Gupta G.S.,. 2. Managerial Economics, Tata Mcgraw-Hill, New Delhi Moyer. &Harris.
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Managerial Economics – Varshney and Maheshwari, Sultan Chand and Sons, New Delhi. 3. 5. Managerial Economics – G.S. Gupta, T M H, New Delhi. portal7.info: Managerial Economics: Concepts and Cases: Managerial Economics deals with five important problem areas in which economic analysis has. Gupta G.S., MANAGERIAL ECONOMICS, Tata McGraw-HilI. 2. 3AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files.
People have limited number of needs which must be satisfied if they are to survive as human beings. Some are material needs, some are psychological needs and some others are emotional needs. Peoples needs are limited; however, no one would choose to live at the level of basic human needs if they want to enjoy a better standard of living. This is because human wants desire for the consumption of goods and services are unlimited. It doesnt matter whether a person belongs to the middle class in India or is the richest individual in the World, he or she wants always something more.
Resources are simply anything used to produce a good or service to achieve a goal.
Economic decisions involve the allocation of scarce resources so as to best meet the managerial goal. The nature of managerial decision varies depending on the goals of the manager. Managerial economics is the study of how scarce resources are directed most efficiently to achieve managerial goals.
It is a valuable tool for analyzing business situations to take better decisions. Evan J Douglas defines Managerial Economics as Managerial Economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or organization under the conditions of uncertainty According to Milton H Spencer and Louis Siegelman Managerial Economics is the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management According to Mc Nair and Miriam, Managerial Economics consists of the use of economic modes of thoughts to analyze business situations.
Economics can be divided into two broad categories: micro economics and macro economics. Macro economics is the study of the economic system as a whole. It is related to issues such as determination of national income, savings, investment, employment at aggregate levels, tax collection, government expenditure, foreign trade, money supply etc.
Managerial economics is an application of the principles of micro and macro economics in managerial decision making. The economic way of thinking about business decision making provides all managers with a powerful set of tools and insights for furthering the goals of their organization. Successful managers take good decisions, and one of their most useful tools is the methodology of managerial economics.
Managerial economics is a practical subject therefore it is pragmatic. Managerial economics describes, what is the observed economic phenomenon positive economics and prescribes what ought to be normative economics 4. Managerial economics is based on strong economic concepts. Managerial economics analyses the problems of the firms in the perspective of the economy as a whole macro in nature 6.
It helps to find optimal solution to the business problems problem solving Managerial Economics And Other Disciplines Managerial economics has its relationship with other disciplines for propounding its theories and concepts for managerial decision making. Essentially it is a branch of economics. Managerial economics is closely related to certain subjects like statistics, mathematics, accounting and operations research.
Managerial economics helps in estimating the product demand, planning of production schedule, deciding the input combinations, estimation of cost of production, achieving economies of scale and increasing the returns to scale.
It also includes determining price of the product, analyzing market structure to determine the price of the product for profit maximization, which helps them to control and plan capital in an effective manner. Successful mangers make good decisions, and one of their most useful tools is the methodology of managerial economics.
Buffett credits his success to a basic understanding of managerial economics. Buffetts success is a powerful testimony to the practical usefulness of managerial economics. Managerial economics has a very important role to play by helping managements in successful decision making and forward planning.
To discharge his role successfully, a manager must recognize his responsibilities and obligations. There is a growing realization that the managers contribute significantly to the profitable growth of the firms. We can conclude that managerial economics consists of applying economic principles and concepts towards adjusting with various uncertainties faced by a business firm.
Circular Flow Of Economic Activity The individuals own or control resources which are necessary inputs for the firms in the production process. These resources factors of production are classified into four types. Land: It includes all natural resources on the earth and below the earth. Non renewable resources such as oil, coal etc once used will never be replaced.
It will not be available for our children.
The greater the cross elasticity, the more closely related the two goods are. If the two goods have no relationship, the cross elasticity between them will be zero.
The concept of cross elasticity of demand is useful in measuring the interdependence of demand for a commodity and the prices of its related commodities.
Its knowledge thus helps a firm to estimate the likely effects sales of pricing decisions of its competitors on its own sales. It can be computed from the following formula: I DX For superior goods income elasticity is positive, whereas for inferior good it is negative. Positive income elasticity can assume three forms: When a change in income results in a direct and more than proportionate change in the quantity demanded, the income elasticity is said to be positive and more than unity.
Luxury goods are its example. When a change in income leads to a direct and proportionate change in the quantity demanded, then it is known as positive and unit income elasticity. Its examples include semi-luxury and comfort goods. When an increase in income results in a less than proportionate increase in quantity demanded, then the elasticity is positive and less than unity.
Necessary goods falls under this category. The income elasticity is negative when an increase in income leads to a decrease in quantity demanded. Inferior quality goods came under this category. Knowledge of income elasticities of demand for various commodities is useful in determining the effects of changes in business activity on various industries. It measures the expansion of demand through advertisement and other promotional strategies. It is also known as advertisement elasticity of demand.
It may be expressed as: The advertisement elasticity is always positive. This is because both informative and persuasive types of advertisements are used which increase sales.
The higher the elasticity, the better it is for the firm to spend on promotional activities. Demand analysis attempts to identify and measure the factors that determine sales, on the basis of which alternative methods of manipulating or managing demand can be worked out.
Demand forecasting attempts to estimate the expected future demand for a product, which helps to plan production better. In this context, it is important to understand the types and determinants of demand and their relative importance. Demand is broadly classified as: The former includes clothes, houses, food, etc.
Those goods which can be consumed only once are known as perishable goods, whereas the durable goods can be used more than once during a period of time. For example, vegetables, fruits and milk are perishable consumer goods, while oil, raw materials and coal are non-durable producer goods. For example, the demand for steel is not for its own sake, but for satisfying the demand for construction.
On the other hand, autonomous demand is wholly independent of all other demands. It is difficult to name a product which is fully autonomous d Firm and industry demands — Firm demand represents the demand for products of a single company, while industry demand refers to the demand of an industry. Segments include different regions, product use, distribution channels, customer sizes, and sub-products.
Each of them differ significantly with respect to delivered prices, net profit margins, competition, seasonal patterns and cyclical sensitivity. Wide differences in them call for a demand analysis restricted to an individual market segment, which in turn would help a firm to manipulate the total demand. Risk and uncertainty are involved in every decision-making process.
The producer, manager or any decision-making authority should be aware of the existing level of demand for the products being produced, and estimate the gap between demand and supply. In a growth-oriented decision-making process, the manager decision-maker is expected to know the changes that are expected to take place in the future demand.
Such knowledge would help to determine the targets to be achieved to match the future demand with the available supply. Thus, the manager decision-maker, whether a firm or a state planning agency, must not only estimate the present level of demand, but should also forecast the future demand Barla The extent of objectivity and precision with which demand for a product is estimated and projected for the future would determine the ability of a decision-making agent in dealing with further uncertainties.
For example, if there is a possibility of rise in the prices of petroleum products, the automobile producers may plan to switch over to the production of smaller cars. Such switch-over decisions need to be made on the basis of accuracy of demand forecasts.
Thus, major decisions in business enterprises depend upon forecasts of one kind or the other. Specification of the purpose of demand forecasts is the foremost task in forecasting demand. Next, selection of appropriate technique for the purpose is important. If it is proposed to use regression method, the model has to be specified properly by identifying the necessary variables and the nature of relationship between X and Yj.
Collection of quality and adequate data for the demand forecasting would determine the quality and reliability of results. Hence, the data collected should also be representative. The results obtained through the analysis of collected data, either manually or with the help of computers, should be interpreted carefully in correspondence with the objectives examined.
A model used for demand forecasting with objectivity, would yield good results. The results, however, need to be verified by persons possessing professional acumen and expertise. Different levels of demand forecast may be attempted by business firms. They are: Micro-level — Under it, the forecasting is restricted to a particular brand or specific product, like the demand for BPL televisions or Maruti cars. Meso level — Here, a firm attempts to project the demand for a product group, like the demand for washing machines.
Macro level — When a firm attempts to examine the future demand for all automobiles or TV sets rather than the demand for a particular brand name or product group, it is known as macro level forecasting of demand.
A private sector forecasts demand on the basis of past experience and the data collected from various sources. Similarly, a public sector uses data collected by different government and research agencies for the purpose. The following are some of the techniques adopted for estimating the existing and future demands. This technique is based on the assumption that collective judgment of knowledgeable persons may serve as an important source of information.
The personal insights of such persons may help in forecasting the demand for some products. These key persons use their own perceptions and evaluate future prospects.
It is quite likely that due to different perceptions, different experts may view the future demand differently. Under such circumstances, they are requested to revise their estimates until consensus is reached through upward adjustments by some experts and downward adjustments by the others Barla In this method, an individual is assigned the task of forecasting the demand by personally studying the changes that have taken place in the national and international scenario and then come out, without any personal bias, with a forecast.
This technique has the merit that each expert or panel member is expected to assess their own forecast. However, this is an expensive and time consuming technique. Besides, sometimes one or more experts may refuse to revise the forecasts once given, which would create problem. There are different types of market surveys, viz. These techniques provide relevant information depending upon the extent of survey conducted. Trend Projections: It is the most widely used and the simplest technique for extrapolating the demand for a product on the basis of past trend, assuming that the past trend would continue in the future.
There are two methods of conducting trend projections: The year to year oscillations are smoothened and a trend line is fitted using a statistical method, so that the squared values of upward and downward deviations from the trend add to zero. The following formula is used for projecting this demand: In other words, g is the compound growth rate. Econometric method: In this method of demand forecasting, it is assumed that demand is determined by one or more variables, e.
A demand function determined by only one variable is expressed as follows: An econometric model involving two or more independent variables may be shown as: Yn Its multiple regression equation will be of the form: In sum, the econometric forecasting of demand for X would be based on: End use method: For example, cement may be used for constructing houses, hotels, bridges, roads, etc. Therefore, while estimating its present demand and for forecasting its future demand, the demand for the good in different uses has to be taken into consideration.
Barometric forecasting: At times, a business concern may assign the task of demand forecasting to some expert agency, which would attempt to forecast the demand on the basis of signals received from the policies adopted or the events that had taken place within the country or in other countries. A producer allocates various factors of production for maximization of profit, for which knowledge of both the present and future demand are important. Future demand estimates helps the producer to plan the extent of expansion in scale of operations, so as to deal with the increased demand and earn higher profits.
It helps government to formulate economic policies through the planning boards or planning commissions to allocate resources for economic development through production in the public, private and export sectors to achieve the targets set for a given time period. It also ensures adequate supply of inputs for achieving the objectives of industrial policy, import-export policies, credit policy, public distribution system, and other related policies, which involves forecasting of future demand.
Demand forecasts are also useful to researchers, social workers and others with futuristic approach, to understand the levels of future demand or supply, the gaps, and their expected impact on prices or the economy. Traditionally, economic theory considers four factors of production, namely, land, labour, capital and organisation or management. Now, technology is also considered as an important determinant, as it contributes to output growth.
This relationship may be expressed as follows: This function describes a general production function. For the production of different commodities, one or all the factor inputs may not be equally important for all commodities. The importance of a factor of production varies from product to product. For instance, while land is the most important factor in the case of an agricultural product, its importance is relatively lower in the case of a manufacturing product.
Meanwhile, the significance of management and technology may be greater in the case of an industrial product, rather than for an agricultural product. Therefore, researchers modify the production function according to the product and the specific objectives analysed.
Generally for the analysis of production decision problems, labour and capital are the only two factor inputs considered for convenience. Then, the production function reduces to: K For a given level of output of commodity X, various combinations of L and K may be used, which is known as production process or technology.
Further, these combinations would also vary with variations in the level of X. Usually for production, both labour and capital are necessary and they substitute each other. Whereas, if more of capital is used in relation to labour, the production technique becomes capital intensive. In other words, a producer is in equilibrium when the highest isoquant is reached, given a particular isocost or price line.
An isoquant IQ represents different combinations of labour and capital which yields the same level of output of a commodity. At the point of tangency, the absolute slope of the isoquant is equal to the absolute slope of the isocost line. PL and PK represent the prices of labour and capital respectively. The slope of the isocost line represents the price ratios of the two factor inputs, L and K, given the total outlay. Marginal product MP is the addition of output made to total output by employing one more unit of the factor input.
The slope of the isoquant represents the MP ratios of L and K. At equilibrium, the MP of the last unit spent on labour is the same as the MP of the unit spent on capital.
IQ3 is desirable, but not attainable with the given isocost line. Further, at IQ1 the firm would not be maximizing output. In the short-run, atleast one factor of production remains fixed. For instance, in the case of an agricultural production function, various alternative commodities of labour or capital per unit of time may be used in relation a fixed amount of land.
The AP curve usually first rises, reaches a maximum, and then falls, but remains positive as long as the TP is positive. The MPL is equal to the slope of the TP curve, reflecting the change in output due to a unit change in input. The MP curve also rises first, reaches a maximum before the AP curve reaches its maximum , and then declines.
The MP becomes zero when the TP is maximum. This is the law of diminishing returns. If labour is factor input considered, the relationship between the APL and MPL curves can be used to define the three stages of production.
Stage I starts from the origin to the point where the APL is maximum. A rational producer will not operate in stage III, even with free labour, because it is possible to increase total output by using less labour on the given land.
Likewise, a rational producer will not operate in stage I because it corresponds to the area where full TP is still increasing with an additional unit of labour employed.
Therefore, a rational producer would only operate in stage II. This is shown by diagram Land: It includes all natural resources on the earth and below the earth. Non renewable resources such as oil, coal etc once used will never be replaced. It will not be available for our children. Renewable resources can be used and replaced and is not depleted with use.
Labour: is the work force of an economy. The value of the worker is called as human capital. Capital: It is classified as working capital and fixed capital not transformed into final products Entrepreneurship: It refers to the individuals who organize production and take risks. All these resources are allocated in an effective manner to achieve the objectives of consumers to maximize satisfaction , workers to maximize wages , firms to maximize the output and profit and government to maximize the welfare of the society.
The fundamental economic activities between households and firms are shown in the diagram. The circular flows of economic activities are explained in a clockwise and counterclockwise flow of goods and services. The four sectors namely households, business, government and the rest of the world can also be considered to see the flow of economic activities.
The circular flow of activity is a chain in which production creates income, income generates spending and spending in turn induces production. The major four sectors of the economy are engaged in three economic activities of production, consumption and exchange of goods and services.
These sectors are as follows: Households: Households fulfill their needs and wants through download of goods and services from the firms. They are owners and suppliers of factors of production and in turn they receive income in the form of rent, wages and interest. Firms: Firms employ the input factors to produce various goods and services and make payments to the households.
Government: The government downloads goods and services from firms and also factors of production from households by making payments. Foreign sector: Households, firms and government of India download goods and services import from abroad and make payments. On the other hand all these sectors sell goods and services to various countries export and in turn receive payments from abroad Chart - 1 Circular Flow Of Economic Activity The above said four agents take economic decisions to produce goods and services and to exchange them and to consume them for satisfying the wants of the economy as a whole.
Understanding the opportunities and constraints in the exchange is essential to take better decision in business. This is discussed in the forthcoming chapters in detail. The economy comprises of the interaction of households, firms, government and other nations. Households own resources and supply factor services like land, raw material, labour and capital to the firms which helps them to produce goods and services.
In turn, firms pay rent for land, wages for their labour and interest against the capital invested by the households. The earnings of the household are used to download goods and services from the firms to fulfill their needs and wants, the remaining is saved and it goes to the capital market and is converted as investments in various businesses.
The household and business firms have to pay taxes to the government for enjoying the services provided. On the other hand firms and households download goods and services import from various countries of the world.
Firms tend to sell their products to the foreign customers export who earn income for the firm and foreign exchange for the country. Therefore, it is clear that households supply input factors, which flow to firms.
Goods and services produced by firms flow to households. Payment flows in the opposite direction refer chart 1 Nature Of The Firm A firm is an association of individuals who have organized themselves for the purpose of turning inputs into output. The firm organizes the factors of production to produce goods and services to fulfill the needs of the households. Each firm lays down its own objectives which is fundamental to the existence of a firm.