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Introduction To Managerial Economics

Managerial economics applies microeconomic principles and analysis to business decision-making. It uses model-building to help managers rationally analyze decisions involving risk, demand, production costs, pricing, and market structure. The modeling process involves making assumptions, deducing their implications, making predictions, and testing those predictions against evidence to determine if the model is valid. Managerial economics examines how a firm can most effectively achieve its objectives.

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177 views15 pages

Introduction To Managerial Economics

Managerial economics applies microeconomic principles and analysis to business decision-making. It uses model-building to help managers rationally analyze decisions involving risk, demand, production costs, pricing, and market structure. The modeling process involves making assumptions, deducing their implications, making predictions, and testing those predictions against evidence to determine if the model is valid. Managerial economics examines how a firm can most effectively achieve its objectives.

Uploaded by

mrbabu14
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Jamshed uz Zaman

What is Managerial Economics


Douglas - Managerial economics is .. the application of

economic principles and methodologies to the decisionmaking process within the firm or organization.
Pappas & Hirschey - Managerial economics applies

economic theory and methods to business and administrative decision-making.


Salvatore - Managerial economics refers to the application

of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.

What is Managerial Economics (contd.)


Howard Davies and Pun-Lee Lam It is the application of economic analysis to business problems; it has its origin in

theoretical microeconomics.

What is Managerial Economics (contd.)


It is an application of that part of microeconomics that

focuses on Risk Demand Production Cost Pricing, and Market Structure. It helps rational decision making through MODEL BUILDING

The Process of Model-building


The economics method
The steps: the hypothetical-deductive approach
make assumptions about behaviour work out the consequences of those assumptions make predictions test the predictions against the evidence PREDICTIONS SUPPORTED? The model is accepted as

a good explanation (for the moment) PREDICTIONS REFUTED? Go back and re-work the whole process

Definitions & assumptions

Theoretical analysis

If predictions not supported by data, model is amended or discarded If predictions borne out by data, the model is valid, for the moment
6

Predictions

Predictions tested against data

Revenue (=GDP) MARKETS FOR GOODS AND SERVICES

Spending (=GDP)

Good and services sold

Good and services bought

FIRMS

HOUSEHOLDS

Inputs for Production

MARKETS FOR FACTORS OF PRODUCTION

Land, labor and capital

Wages, rent, interest and profit (=GDP)

Income (=GDP)

Flow of goods & services Flow of money: pesos

THE CIRCULAR FLOW DIAGRAM

Assumptions
Assumption: The economy composed

of households and firms only


Households: own factors of

production, consume goods and service


Firms: hire factors of production to

produce goods and services

The Circular Flow of Economic Activity


The diagram above represents the transactions

between firms and households in a simple economy.

In the upper loop, the arrow emanating from firms to

households represents the sale by firms of goods and services to households. On the other hand, the arrow from households to firms represents the payments.

In the lower loop, the arrow originating from the

households to the firms shows that firms hire labor and capital from households in order to produce goods and services. The arrow emanating from the firms indicates their payments for the use of the factors of production.

The Circular Flow of Economic Activity


Prices of outputs and inputs are

determined in these markets and guide the decisions of all market participants, The firm, an entity, organizes factors of production to produce goods and services, The prices of product and factor of production guide interaction between individual and firms.

Theory of the Firm


Expected Value Maximization
Owner-managers maximize short-run profits. Primary goal is long-term expected value maximization.

Constraints and the Theory of the Firm


Resource constraints. Social constraints

Limitations of the Theory of the Firm


Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient managers.

Profit Measurement
Business Versus Economic Profit
Business (accounting) profit reflects

explicit costs and revenues. Economic profit.


Profit above a risk-adjusted normal return. Considers cash and noncash items.

Variability of Business Profits


Business profits vary widely.

Why Do Profits Vary Among Firms?


Disequilibrium Profit Theories Rapid growth in revenues. Rapid decline in costs.
Compensatory Profit Theories
Better, faster, or cheaper than the

competition is profitable.

Role of Business in Society


Why Firms Exist
Business is useful in satisfying consumer

wants. Business contributes to social welfare

Social Responsibility of Business Serve customers. Provide employment opportunities. Obey laws and regulations.

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