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CH 1

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21 views16 pages

CH 1

Uploaded by

ANDUALEM MENGISTE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER ONE

INTRODUCTION TO
MANAGERIAL ECONOMICS
The Nature and Scope of Managerial Economics

Definition (What is Managerial Economics?)


• These days due to complexities associated with
business decisions has increased the need for
application of economic concepts, theories and
tools of economic analysis in business decisions.
• Because making appropriate business decision
requires clear understanding of existing market
conditions, market fundamentals and the business
environment in general.
2
Cont’d…

Business decision-making processes, therefore,


requires intensive and extensive analysis of the
market conditions in the product, input and
financial markets.
Economic theories, logic and tools of analysis
have been developed for the analysis and
prediction of market behaviors.

3
Cont’d . . .

The discovery of managerial economics as a


separate course in management studies has,
therefore, been attributed to three major factors:
 The growing complexity of business decision-
making processes, because of changing market
conditions and the globalization of business
transactions.
The increasing use of economic logic, concepts,
theories, and tools of economic analysis in business
decision-making processes.
Rapid increase in demand for professionally trained
4 managerial manpower.
Cont’d . . .

Thus, Managerial Economics is defined as;


The study of economic theories, logic and tools of economic

analysis, used in the process of business decision making.


It involves the understanding and use of economic theories

and techniques of economic analysis in analyzing and solving


business problems.
It refers to the application of economic theory and the tools of

analysis of decision science to examine how an organization


can achieve its aims or objectives most efficiently.
5
Economic Analysis and Business Decision Making

It involves the following


phases
Business decision-making • Phase One: Determining and defining
basically involves the selection the objective to be achieved.
of best out of alternative • Phase Two: Collection and analysis
of information on economic, social,
opportunities open to the political, and technological
business organization. environment.
• Phase Three: Inventing, developing
and analyzing possible course of
action
• Phase Four: Selecting a particular
course of action from available
alternatives.
6
Cont’d…
Note that phases two and three are the most crucial in
business decision-making.
They put the manager’s analytical ability in determining
the appropriateness and validity of decisions in the
modern business environment.
Decision making lies at the heart of most important
business and government problems.
 Managerial economics applies many familiar concepts
from economics
Demand and cost, monopoly and competition, the
allocation of resources, and economic trade-offs—to aid
7 managers in making better decisions.
Cont’d…
Suppose a business firm plans to launch a new
product for which close substitutes are available in
the market; one method of deciding whether or not
this product should be launched is to obtain the
services of a business consultant. In doing this, the
manager would need to investigate and analyze the
following carefully:
(a) Production related issues; and,
(b) Sales prospects and problems.

8
Cont’d…

With regards
to • Available production techniques;
• Cost of production associated with
production, each production technique;
the manager • Supply position of inputs required for
will be the production process;
• Input prices;
required to • Production costs of the competitive
collect and products; and,
• Availability of foreign exchange, if
analyze inputs are to be imported.
information
9
or data on:
Cont’d…
Regarding
the sales • General market trends;
prospects • The industrial business trends;
• Major existing and potential
and competitors, as well as their respective
problems, market shares;
• Prices of the competing products;
the manager • Pricing strategies of the prospective
competitors;
will be • Market structure and the degree of
required to competition; and,
• The supply position of complementary
collect and goods.
analyze
10
data on:
Scope of Managerial Economics
Managerial economics comprises both micro- and
macro-economic theories.
The area of business issues to which economic theories

can be directly applied are divided into two broad


categories:
 Operational or internal issues, and
 Environment or external issues

11
Cont’d…
Operational
problems - are of
internal nature. • Choice of business and the nature of product
These problems (what to produce);
• Choice of size of the firm (how much to
include all those produce);
problems which • Choice of technology (choosing the factor
arise within the combination);
business • Choice of price (product pricing);
organization and • How to promote sales;
• How to face price competition;
fall within the
• How to decide on new investments;
control of • How to manage profit and capital; and,
management. • How to manage inventory.
Some of the basic
internal issues
12 include:
Cont’d…
• The microeconomic theories dealing with most of these
internal issues include
The theory of demand, which explains the consumer behavior in terms of
decisions on whether or not to buy a commodity and the quantity to be
purchased.
Theory of Production and production decisions. The theory of
production or theory of the firm explains the relationship between
inputs and output.
Analysis of Market structure and Pricing theory. Price theory
explains how prices are determined under different market
conditions.
Profit analysis and profit management. Profit making is the most
common business objective. However, making a satisfactory profit is
not always guaranteed due to business uncertainties.
Theory of capital and investment decisions. It includes choice of
13 investment project; assessing the efficiency of capital; and, the most
Cont’d…
Environmental
issues are issues • The existing economic system
related to the • General trends in production, income,
general business employment, prices, savings and investment,
environment. etc
These are issues • Structure of the financial institutions.
related to the • Magnitude and trends in foreign trade.
• Trends in labor and capital markets.
overall economic, • Government’s economic policies.
social, and • Social organizations, such as trade unions,
political consumers’ cooperatives, and producer
atmosphere of the unions.
country in which • The political environment.
the business is • The degree of openness of the economy
situated. Issues
14
include
Cont’d…
Managerial economics is particularly concerned with those
economic factors (Internal and external) that form the
business climate.
In macroeconomic terms, managerial economics focus on:
Business cycles,
Economic growth, and
Content and logic of some relevant government activities
and policies which form the business environment.

15
……

END OF CHAPTER ONE

16

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