MANAGERIAL

ECONOMICS

- A BriefCompendium

FACILITATOR: Dr. V S
GAJAVELLI

PRESENTED BY:-
KARAN
SOOD
HITANSH
VIJ
CHANDNI
BERI
 CHANDNI
CAUL
BEN C
KURIAN

MANAGERIAL
ECONOMICS:
-A Brief synopsis

Economics in today’s world is ubiquitous. It permeates every possible

strand of the not only the corporte arena but life in general. A thorough
working knowledge of how economics shapes the different institutions,
more specifically business units is imperative to an MBA or for that matter
any scholar. Manangerial Economics is a branch of economics that applies
microeconomic analysis to decision methods of business entities or other
management units. 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.

Managerial economics essentially deals with the allocation of scarce

resources to attain the optimally desired results. Every organization faces
managenent decision problems, as it seeks to achieve its goal or
objective, subject to the constraints it faces.the organization can solve its
problems by the application of economic theory and the tools of decision
science. Economic theory refers to microeconomics and macroeconomics.
It forms an integral part of Mnagerial economics.

Decision sciences also constitue a major chunk of this particular branch of

economics. Mathematical economics and econometrics are the tools it
employs to construct and estimate decision models aimed at determining
the optimal behaviour of the firm. Mathematical economics is used to
formalize the economic models postulated by economic theory.
Econometrics then applies statistical tools to real-world data to estimate
the models postulated by economic theory.
The subject matter of managerial economics aside, it is the functional
areas of business administration studies (which include accounting,
finance, marketing, personnel and production) which provide he
background for managerial decision making. Hence, managerial
economics can be regarded as an overview course of study that integrates
economic theory, decision sciences and the functional areas of business
administration studies.

Managerial Economics consists of the following subdivisions which by their

very nature define it:

• The Basic Process of Decision-Making

• The Basic Theory of the Firm
• The Nature and function of Profits
• Business ethics
• The Basics of Demand, Supply and Equilibrium

THE BASIC PROCESS OF DECISION-MAKING

Decision making can be regarded as an outcome of mental processes

(cognitive process) leading to the selection of a course of action among
several alternatives. Every decision making process produces a final
choice. The output can be an action or an opinion of choice.

Human performance in decision making terms has been the subject of

active research from several perspectives. From a psychological
perspective, it is necessary to examine individual decisions in the context
of a set of needs, preferences an individual has and values they seek.
From a cognitive perspective, the decision making process must be
regarded as a continuous process integrated in the interaction with the
environment. From a normative perspective, the analysis of individual
decisions is concerned with the logic of decision making and rationality
and the invariant choice it leads to.

Yet, at another level, it might be regarded as a problem solving activity

which is terminated when a satisfactory solution is found. Therefore,
decision making is a reasoning or emotional process which can be rational
or irrational, can be based on explicit assumptions or tacit assumptions.

Regardless of the type, all decision-making processes involve or can be

subdivided into five basic steps:

1. Defining the problem

2. Determining the problem
3. Identifying the possible solutions
4. Selecting the best possible solutions
5. Implementing the decisions.

BASIC THEORY OF THE FIRM

A firm is an organization that combines and organizes resources for the

purpose of producing goods and/or services for sale. Proprietorships,
partnerships and corporations are the various types of firms existing
around the world. They account for more tham two-thirds of all goods and
services produced. The non-feasibiltiy of enterpreneurs to involve
themselves extensively int eh various taxing stages of the production
process is the prima facie reason for the existence of firms.

Managerial economics begins by postulating a theory of the firm, which it

then uses to analyze managerial decision making. Originally, the theory of
the firm was based on the assumption that the goal of the firm was to
maximize current or short-term profits. Conversely however, firms often
sacrifice short-term profits for the sake of increasing future or long-term
profits.since both are equally important, the theory of the firm now
postulates that the primary goal or objective of the firm is to maximize the
wealth or the value of the firm, which is nothing but the present value of
all expected future profits of the firm.
In trying to attain its objective, a firm invariably faces various constraints.
The limitations on the availability of the essential inputs essentially gives
rise to these constraints. Inability to procure the desired raw material or
the labour, factory and warehouse space and adequate capital are the
several limitations which lead to constraints. Legal restrains are yet
another source of concern for the firm, since they are inflicted by the
society to bring about equitable social welfare. These constraints emanate
a phenomenon called CONSTRAINED OPTIMIZATION. That is, the primary
goal or objective of the firm is to maximize wealth or the value of the firm
subject to the constraints it faces.

NATURE AND FUNCTION OF

PROFITS

Profit is the making of gain in business activity for the benefit of the
owners of the business. Profit plays a vital role in determining the
performance of a company. The nature of profit can be categorized into
two heads:

1) Business Profit is the difference between the revenue of the firm

and the cost of bringing the product to the market starting from the
production cost.

2) Economic Profit is the difference between a company's total revenue

and its opportunity costs of the capital.

While the concept of business profit is may be useful for accounting

purposes, it is the concept of economic profit that a manager must use in
order to reach correct investment decisions.

BUSINESS ETHICS
Business ethics is a form of applied ethics that examines ethical and
moral problems that arise in a business environment. Business Ethics
seeks to proscribe behavior that businesses, firm managers, and workers
should not engage in. It circumvents all aspects of business and
individual conduct and is relevant to business organizations as a whole.
Applied ethics is a field of ethics that deals with ethical questions in fields
such as medical, technical, legal and business ethics.

Business ethics can be both a normative and a descriptive discipline. As a

corporate practice and a career specialization, the field is primarily
normative. In academia descriptive approaches are also taken. The range
and quantity of business ethical issues reflects the degree to which
business is perceived to be at odds with non-economic social values.
Historically, interest in business ethics accelerated dramatically during the
1980s and 1990s, both within major corporations and within academia.
For example, today most major corporate websites lay emphasis on
commitment to promoting non-economic social values under a variety of
headings (e.g. ethics codes, social responsibility charters). In some cases,
corporations have redefined their core values in the light of business
ethical considerations (e.g. BP's "beyond petroleum" environmental tilt).

Corporate ethics policies

As part of more comprehensive compliance and ethics programs, many
companies have formulated internal policies pertaining to the ethical
conduct of employees. These policies can be simple exhortations in broad,
highly-generalized language (typically called a corporate ethics
statement), or they can be more detailed policies, containing specific
behavioral requirements (typically called corporate ethics codes). They
are generally meant to identify the company's expectations of workers
and to offer guidance on handling some of the more common ethical
problems that might arise in the course of doing business. It is hoped that
having such a policy will lead to greater ethical awareness, consistency in
application, and the avoidance of ethical disasters.
An increasing number of companies also requires employees to attend
seminars regarding business conduct, which often include discussion of
the company's policies, specific case studies, and legal requirements.
Some companies even require their employees to sign agreements stating
that they will abide by the company's rules of conduct.
Many companies are assessing the environmental factors that can lead
employees to engage in unethical conduct. A competitive business
environment may call for unethical behavior. Lying has become expected
in fields such as trading. An example of this is the issues surrounding the
unethical actions of the Salomon Brothers.
Not everyone supports corporate policies that govern ethical conduct.
Some claim that ethical problems are better dealt with by depending upon
employees to use their own judgment.
Others believe that corporate ethics policies are primarily rooted in
utilitarian concerns, and that they are mainly to limit the company's legal
liability, or to curry public favor by giving the appearance of being a good
corporate citizen. Ideally, the company will avoid a lawsuit because its
employees will follow the rules. Should a lawsuit occur, the company can
claim that the problem would not have arisen if the employee had only
followed the code properly.
Sometimes there is disconnection between the company's code of ethics
and the company's actual practices. Thus, whether or not such conduct is
explicitly sanctioned by management, at worst, this makes the policy
duplicitous, and, at best, it is merely a marketing tool.
To be successful, most ethicists would suggest that an ethics policy should
be:
• Given the unequivocal support of top management, by both word
and example.
• Explained in writing and orally, with periodic reinforcement.
• Doable....something employees can both understand and perform.
• Monitored by top management, with routine inspections for
compliance and improvement.
• Backed up by clearly stated consequences in the case of
disobedience.
• Remain neutral and nonsexist.

Related disciplines

Business ethics should be distinguished from the philosophy of business,

the branch of philosophy that deals with the philosophical, political, and
ethical underpinnings of business and economics. Business ethics
operates on the premise, for example, that the ethical operation of a
private business is possible -- those who dispute that premise, such as
libertarian socialists, (who contend that "business ethics" is an oxymoron)
do so by definition outside of the domain of business ethics proper.

The philosophy of business also deals with questions such as what, if any,
are the social responsibilities of a business; business management theory;
theories of individualism vs. collectivism; free will among participants in
the marketplace; the role of self interest; invisible hand theories; the
requirements of social justice; and natural rights, especially property
rights, in relation to the business enterprise.

Business ethics is also related to political economy, which is economic

analysis from political and historical perspectives. Political economy deals
with the distributive consequences of economic actions. It asks who gains
and who loses from economic activity, and is the resultant distribution fair
or just, which are central ethical issues.

THE BASICS OF DEMAND, SUPPLY AND

EQUILIBRIUM

DEMAND refers to how much (quantity) of a product or service is desired

by buyers. The quantity demanded is the amount of a product people are
willing to buy at a certain price; the relationship between price and
quantity demanded is known as the demand relationship.

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher
the price of a good, the less people will demand that good. In other words,
the higher the price, the lower the quantity demanded.
SUPPLY represents how much the market can offer. The quantity
supplied refers to the amount of a certain good producers are willing to
supply when receiving a certain price. The correlation between price and
how much of a good or service is supplied to the market is known as the
supply relationship.

The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities
that will be sold at a certain price. But unlike the law of demand, the
supply relationship shows an upward slope. This means that the higher
the price, the higher the quantity supplied

Equilibrium

When supply and demand are equal (i.e. when the supply function and
demand function intersect) the economy is said to be at equilibrium. At
this point, the allocation of goods is at its most efficient because the
amount of goods being supplied is exactly the same as the amount of
goods being demanded. Thus, everyone (individuals, firms, or countries) is
satisfied with the current economic condition. At the given price, suppliers
are selling all the goods that they have produced and consumers are
getting all the goods that they are demanding.

SHIFT IN DEMAND AND SUPPLY

CURVES
A shift in the demand or supply curve to the left or right on a price–
quantity diagram.

A shift in thedemand curve can arise because of a change in the income

of buyers, a change in the price of other goods, or a change in tastes for
the product. An increase in demand caused by an increase in consumer
incomes shifts the demand curve to the right; as a result, the equilibrium
quantity bought increases, but the equilibrium price also rises.

A shift in the supply curve can arise because of change in the costs of
production, a change in technology, or a change in price of other goods. .
A rise in labour costs leading to a fall in supply shifts the supply curve to
the left; as a result, the equilibrium quantity sold falls while the
equilibrium price rises.