Introduction to Managerial Economics

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Session Objectives
What is managerial economics? Why study managerial economics?

Economics is the art of making the most of life

- GB Shaw

Economics
Definitions from Books:
L. J. Gitman
Economics is the study of how a society uses scarce resources to produce and distribute goods and services.

K. E. Case
Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Economics is the study of rational choice under conditions of scarcity

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Scarcity and Rational Choice

Scarcity Imbalance between the
amount of something that people want amount of something that is freely available

Rational Choice
How to use the scare resources Making calculated self interested decisions Considering costs and benefits and maximizing the outcome (e.g., maximizing satisfaction)
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Economics as a Dismal Science

How do individuals and firms trade-off between alternatives to make themselves as well-off as possible Deals with scarcity

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Knowledge of scarcity helps create abundance

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Importance of an Understanding of Economics

Relationships with other firms Interaction with the market Market interaction with the macro-economy Macro-economys interaction with global economy

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Economics Includes
Behavior of human beings . . .

As individuals . . . (microeconomics)
And as a group . . . (macroeconomics)

For satisfying wants . . . (demand / consumption)

By using resources . . . (supply / production)

That are scarce and have alternate uses . . . (distribution

/ market / policies)
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Basic Classifications of Economic Studies

Macroeconomics The big picture. Study of the operation of the economy as a whole. It looks at aggregate data. Microeconomics A small-scale study. Focuses on individual entities of the economy, such as households and firms.

Focuses more at the policy and regulatory levels.

focuses at the firm level

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Examples of microeconomic and macroeconomic concerns

Production Microeconomics Production/Output in Individual Industries and Businesses How much steel How many offices How many cars Prices Price of Individual Goods and Services Price of medical care Price of petrol Food prices Apartment rents Income Distribution of Income and Wealth Wages in the auto industry Minimum wages Executive salaries Poverty Employment Employment by Individual Businesses & Industries Jobs in the steel industry Number of employees in a firm

Macroeconomics

National Production/Output Total Industrial Output Gross Domestic Product Growth of Output

Aggregate Price Level Consumer prices Producer Prices Rate of Inflation

National Income Total wages and salaries Total corporate profits

Employment and Unemployment in the Economy Total number of jobs Unemployment rate

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Economics is both Positive and Normative

It is positive when it is confined to statements of cause and effects and to functional relations of economic variables. It is normative when it involves norms and standards mixing them with cause-effect analysis.

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 Positive Economics - What it is , What was and What will be

Eg. Physics, Chemistry - How things work or behave

Normative Economics What ought to be

Eg. Ethics How we should behave Distribution of income in India is unequal Distribution of income in India should be equal
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Methods
Model Building

Ceteris paribus Other things remaining constant

Static, Comparative Marginalism

Decision criteria optimization

Normative v/s Positive

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Theories and Models

Theories involve models, and models involve variables. A model is a formal statement of a theory. Models are descriptions of the relationship between two or more variables. A variable is a measure that can change from observation to observation. Ockhams razor is the principle that irrelevant detail should be cut away. Models are simplifications, not complications, of reality.
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Theories and Models

Pitfalls to avoid in formulating economic theory:
The post hoc, ergo propter hoc fallacy refers to a common error made in thinking about causation: If event A happened before event B, it is not necessarily true that A caused B. The fallacy of composition is the erroneous belief that what is true for a part is also true for the whole.
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Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively

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Managerial Economics
Managerial economics is the integration of the economic theory with business practice for the purpose of facilitating decision making and forward planning by management. Managerial economics is concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions. Mansfield Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management
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 A powerful analytical engine. Evaluating Choice Alternatives

How Is Managerial Economics Useful?

Identify ways to efficiently achieve goals. Specify pricing and production strategies. Provide production and marketing rules to help maximize net profits.

Making the Best Decision

Managerial economics can be used to efficiently meet management objectives. Managerial economics can be used to understand logic of company, consumer, and government decisions. The basis for some of the more rigorous analysis of issues in Marketing and Strategic Management.
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Links between Managerial Economics and Management Science

Managerial economics: is often concerned with finding optimal solutions to decision problems. However, the primary purpose of using models is to predict how firms will behave, not to advise them what ought to do. Managers are assumed to find the optimal solutions for themselves and that is how predictions are made.

Management science: is essentially concerned with techniques for the improvement of decision-making and hence it is essentially normative; firms are not assumed to find the optimal solutions for themselves. They are found by the researchers who then present them as prescriptions for what the firm should do.

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Queries ?????

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