MANAGERIAL ECONOMICS Managerial economics can be broadly defined as the study of economics theories, logic and tools of economic

analysis that are used in the process of decision making.

Managerial economics is concerned with the application of economic principles & methodologies to the decision making process within the firm or organization. It seeks to establish rules &principles to facilitate the attainment of the desired economic goals of the management. Douglas

It is the integration of economic theory with business practice for the purpose of facilitating decision making & forward planning by management. Spencer & Seigleman

Like an economy, the manager of a firm also faces five basic issues:(1) Choice of product, i.e., the products a firm has to produce A manager has to allocate the available resources, so as to maximize the profit of the firm. (2) Choice of inputs After determining the profit maximizing level of output, the manager has to identify the input-mix which would produce the profit maximizing level of output at minimum cost. (3) Distribution of the firms revenue The revenue received by the firm through sales has to be distributed in a just and fair manner by the manager. Workers, owner of factory building, bankers, and all those who have contributed their materials and services in the process of production, storage and transportation, have to be paid remunerations, according to the terms and conditions already agreed upon. The residual after such payments constitutes the firms profit which has to be distributed among the owners of the firm after tax payment. (4) Rationing - This constitutes an important function of a manager. He/she should utilize the scarce resources optimally, which involves expenditure. As the manager has to often look after several plants simultaneously, he/she must prioritize not only the allocation of resources but also the time. (5) Maintenance and expansion In addition, the manager has to plan strategies to ensure that the level of output is maintained,

the efficiency of the firm is retained over time, and also to plan the future expansion of the firm.

SIGNIFICANCE: Managerial economics helps the decision making process in following ways: Provides number of tools & techniques. It provides most of the concepts that are needed for the analysis of business problems. Concepts of elasticity of demand, fixed and variable costs, short and long run costs, net present value, etc. Helpful in making decisions such as: Demand estimation and forecasting. Price & output decision. Choice of a technique of production. Advertising decision. Investment decision Issues & problems of concerned industry.

NATURE: Managerial economics is the science of directing scarce resources to manage cost effectively. Wherever resources are scarce, a manager can make more effective decisions by applying the discipline of managerial economics. These

may be decisions with regard to customers, suppliers, competitors, or the internal workings of the organization. It does not matter whether the setting is a business, nonprofit organization, or home. In all of these settings, managers must make the best of scarce resources. The chief source of concepts and analytical tools for managerial economics is micro economic theory. Some of the popular micro economic concepts (elasticity of demand, marginal cost, opportunity cost, market structures, etc.) and well accepted models (kinked demand model, model for monopoly price etc.) are used in managerial economics. Macro-economic conditions also set the limits within which the business management operates.it can ignore neither the working of the market, nor the pace of economic change, nor the activities of government.

MANAGERIAL ECONOMICS has both prescriptive and descriptive role. It not only explains how various economic forces affect the working of a firm but also predicts the consequences of the decisions made by it. This is descriptive role. In addition to this, managerial economics prescribes the rules for the improvement of decision making by firms or their managers so they can achieve their objectives efficiently.

Scope of Managerial Economics: Scope means province or an area of study. There is hardly any uniform pattern as regards the scope of managerial economics as it is comparatively a new subject. However, the scope of managerial economics may be discussed under following points. Area of Study: Broadly speaking managerial economics deals with the following topics. Demand Analysis and Forecasting: Effective decision making at the firm level depends on accurate estimates of demand. Demand analysis aims at discovering the forces that determine sales. The demand analysis mainly relates to the study of demand, determinants, demand distinctions and demand forecasting. Cost and Production Analysis: Cost estimates are also essential for effective decision making and production planning at the firm level. Profit planning, cost control and sound pricing practices call for accurate cost and production analysis. Cost relations are production function and cost control. Pricing Decisions, Policies and Practices: Pricing is an important area of managerial economics. Success of a business firm largely depends on the accuracy of price decisions. Price determinations under different markets,

pricing methods policies, product line pricing and price forecasting are some of the topics of this area. Profit Management: Business firms are mainly profit hunting institutions. The success of the firm is always measured in terms of profits. Nature and management of profit, profit policies and techniques and profit planning are the important aspects covered in this area. Capital Management: The most complex, troublesome problem faced by the business manager is the capital management. Capital management implies planning and control of capital expenditure. Cost of capital rate of return and selection of projects are the important points under this. Linear Programming and Theory of Games: Since managerial economics and operations research are closely connected with each other, managerial economics has started using such techniques of operations research as linear programming and the theory of games. Recently the linear programming and the theory of games have been brought as part of managerial economics. Profits a central point in managerial economics: Profit in other words is the central concept of managerial economics. Without profits business firms cannot run. The maximization of profits is the main objective of any firm or a business unit. The survival of the firm is determined by the ability of a firm to earn profits. Profit is the main indicator of firms success.

Optimization: Optimization is another important concept used in economic theory and managerial economics. Managerial economics often aims at optimizing a given objective. In recent years, a new concept was found out called Sub-Optimization. The greatest merit of this concept is its flexibility.