14-01-2013, 04:54 PM
Managerial Economics
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After going through this unit, you will be able to:
• Explain succinctly the meaning and definition of managerial economics
• Elucidate on the characteristics and scope of managerial economics
• Describe the techniques of managerial economics
• Explain the application of managerial economics in various aspects of decision
making
• Explicate the application of managerial economics in marginal analysis and
optimisation
Time Required to Complete the unit
1. 1st Reading: It will need 3 Hrs for reading a unit
2. 2nd Reading with understanding: It will need 4 Hrs for reading and understanding a
unit
3. Self Assessment: It will need 3 Hrs for reading and understanding a unit
4. Assignment: It will need 2 Hrs for completing an assignment
5. Revision and Further Reading: It is a continuous process
Introduction
Managerial decisions are an important cog in the working wheel of an organisation.
The success or failure of a business is contingent upon the decisions taken by managers.
Increasing complexity in the business world has spewed forth greater challenges for
managers. Today, no business decision is bereft of influences from areas other than the
economy. Decisions pertinent to production and marketing of goods are shaped with a view
of the world both inside as well as outside the economy. Rapid changes in technology,
greater focus on innovation in products as well as processes that command influence over
marketing and sales techniques have contributed to the escalating complexity in the
business environment. This complex environment is coupled with a global market where
input and product prices are have a propensity to fluctuate and remain volatile. These
factors work in tandem to increase the difficulty in precisely evaluating and determining the
outcome of a business decision. Such evanescent environments give rise to a pressing need
for sound economic analysis prior to making decisions. Managerial economics is a discipline
that is designed to facilitate a solid foundation of economic understanding for business
managers and enable them to make informed and analysed managerial decisions, which are
in keeping with the transient and complex business environment.
Concept of Managerial Economics
The discipline of managerial economics deals with aspects of economics and tools of
analysis, which are employed by business enterprises for decision-making. Business and
industrial enterprises have to undertake varied decisions that entail managerial issues and
decisions. Decision-making can be delineated as a process where a particular course of
action is chosen from a number of alternatives. This demands an unclouded perception of
the technical and environmental conditions, which are integral to decision making. The
decision maker must possess a thorough knowledge of aspects of economic theory and its
tools of analysis. The basic concepts of decision-making theory have been culled from
microeconomic theory and have been furnished with new tools of analysis. Statistical
methods, for example, are pivotal in estimating current and future demand for products.
The methods of operations research and programming proffer scientific criteria for
maximising profit, minimising cost and determining a viable combination of products.
Managerial Economics
Decision-making theory and game theory, which recognise the conditions of uncertainty and
imperfect knowledge under which business managers operate, have contributed to
systematic methods of assessing investment opportunities.
Almost any business decision can be analysed with managerial economics
techniques. However, the most frequent applications of these techniques are as follows:
• Risk analysis: Various models are used to quantify risk and asymmetric information and
to employ them in decision rules to manage risk.
• Production analysis: Microeconomic techniques are used to analyse production
efficiency, optimum factor allocation, costs and economies of scale. They are also
utilised to estimate the firm's cost function.
• Pricing analysis: Microeconomic techniques are employed to examine various pricing
decisions. This involves transfer pricing, joint product pricing, price discrimination, price
elasticity estimations and choice of the optimal pricing method.
• Capital budgeting: Investment theory is used to scrutinise a firm's capital purchasing
decisions.