Joel Dean observes managerial economics shows how economic analysis can . o Ratio analysis helps to determine the liquidity, solvency, profitability of the. Definition, Nature and Scope of Managerial Economics–Demand Analysis: Demand turnover ratio and Debtor Turnover ratio), Capital structure Ratios ( Debt-. Engineering Class handwritten notes, exam notes, previous year questions, PDF free download.
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Strategic planning is now a new addition to the scope of managerial economics with the emergence of multinational corporations. The perspective of strategic planning is global. It is in contrast to project planning which focuses on a specific project or activity. In fact the integration of managerial economics and strategic planning has given rise to be new area of study called corporate economics.
Environmental or External Issues: An environmental issue in managerial economics refers to the general business environment in which the firm operates. They refer to general economic, social and political atmosphere within which the firm operates. A study of economic environment should include: jntuworldupdates. The type of economic system in the country. The general trends in production, employment, income, prices, saving and investment.
Trends in the working of financial institutions like banks, financial corporations, insurance companies d.
Magnitude and trends in foreign trade; e. Trends in labour and capital markets; f. The environmental issues highlight the social objective of a firm i. Private gains of the firm alone cannot be the goal. The environmental or external issues relate managerial economics to macro economic theory while operational issues relate the scope to micro economic theory. The scope of managerial economics is ever widening with the dynamic role of big firms in a society. Managerial economics relationship with other disciplines: Many new subjects have evolved in recent years due to the interaction among basic disciplines.
While there are many such new subjects in natural and social sciences, managerial economics can be taken as the best example of such a phenomenon among social sciences. Hence it is necessary to trace its roots and relation ship with other disciplines. Relationship with economics: The relationship between managerial economics and economics theory may be viewed form the point of view of the two approaches to the subject Viz.
Micro Economics and Marco Economics. Microeconomics is the study of the economic behavior of individuals, firms and other such micro organizations. Managerial economics is rooted in Micro Economic theory. Managerial Economics makes use to several Micro Economic concepts such as marginal cost, marginal revenue, elasticity of demand as well as price theory and theories of market structure to name only a few.
Macro theory on the other hand is the study of the economy as a whole. It deals with the analysis of national income, the level of employment, general price level, consumption and investment in the economy and even matters related to international trade, Money, public finance, etc. The relationship between managerial economics and economics theory is like that of engineering science to physics or of medicine to biology. Managerial economics has an applied bias and its wider scope lies in jntuworldupdates.
Both managerial economics and economics deal with problems of scarcity and resource allocation. Management theory and accounting: Managerial economics has been influenced by the developments in management theory and accounting techniques. Accounting refers to the recording of pecuniary transactions of the firm in certain books. A proper knowledge of accounting techniques is very essential for the success of the firm because profit maximization is the major objective of the firm.
Managerial Economics requires a proper knowledge of cost and revenue information and their classification. A student of managerial economics should be familiar with the generation, interpretation and use of accounting data.
Managerial Economics and mathematics: The use of mathematics is significant for managerial economics in view of its profit maximization goal long with optional use of resources. The major problem of the firm is how to minimize cost, hoe to maximize profit or how to optimize sales. Mathematical concepts and techniques are widely used in economic logic to solve these problems. Also mathematical methods help to estimate and predict the economic factors for decision making and forward planning.
Mathematical symbols are more convenient to handle and understand various concepts like incremental cost, elasticity of demand etc.
The main concepts of mathematics like logarithms, and exponentials, vectors and determinants, input-output models etc. Besides these usual tools, more advanced techniques designed in the recent years viz. The role of managerial economist in internal management covers wide areas of production. The managerial economist should be adept at investment appraisal methods.
It strength lies in its ability to integrate ideas from various specialized subjects to gain a proper perspective for decision-making. At the external level. The fourth function of the managerial economist is to undertake an economic analysis of the industry. He must be also able to combine philosophic methods with historical methods to get the right perspective only then. He has to be ever alert to gauge the changes in tastes and preferences of the consumers.
In short managerial practices with the help of other allied sciences. He prepares a short-term forecast of general business activity and relates general economic forecasts to specific market trends.
This is concerned with project evaluation and feasibility study at the firm level i. His role in decision-making applies to routine affairs such as price fixation. It refers to the impact of a firm on environmental factors. Security management means.
The managerial economist has to be very alert and dynamic to take correct pricing decision in changing environment. He has to get information on external business environment such as general market conditions.
He should act only after analysis and discussion with relevant departments. The sixth function is an advisory function. Finally the specific function of a managerial economist includes an analysis of environment issues. The pricing decision is one of the most difficult decisions to be made in business because the information required is never fully available.
He has to collect and provide the quantitative data from within the firm. He should have diplomacy to act in advisory capacity to the top executive as well as getting co- operation from different departments for his economic analysis. He should have equanimity to meet crisis. This is very important in the case of defense-oriented industries. He should have the freedom to operate and analyze and must possess full knowledge of facts.
The managerial economist helps to co-ordinate policies relating to production. This security is more necessary in strategic and defense-oriented projects of national importance. Pricing of established products is different from new products.
The role of management economist lies not in taking decision but in analyzing. He should have sound theoretical knowledge to take up the challenges he has to face in actual day to day affairs.
The success of the firm depends upon a proper pricing strategy. He should do well to have intuitive ability to know what is good or bad for the firm.
He may have to anticipate the reactions of competitors in pricing. Modern theory of managerial economics recognizes the social responsibility of the firm. It should not have adverse impact on pollution and if possible try to contribute to environmental preservation and protection in a positive way. Here his advice is required on all matters of production and trade. He may have to operate in an atmosphere constrained by government regulation.
It is the managerial economist of each firm who has to advise them on all matters of trade since they are in the know of actual functioning of the unit in all aspects. In the hierarchy of management. Another function of importance for the managerial economist is a concerned with pricing and related problems. What is managerial economics? Explain its focus are as 2. Point out the importance of managerial economics in decision making 3.
What are the contributions and limitations of economic analysis in business decision making 4. Managerial Economics is the discipline which deals with the applications of economic theory to business management discuss.
Explain the fundamental concepts of managerial economics 6. Managerial Economics is the study of allocation of resources available to a firm or other unit of management among the activities of that unit explains. Explain the nature of problems studies in managerial economics. What is the importance of the study of such problems in business management?
Explain the role and responsibilities of a managerial economics? A d England. When the subject Managerial Economics gained popularity? Which subject studies the behavior of the firm in theory and practice? Which subject bridges gap between Economic Theory and Management Practice?
Making decisions and processing information are the two Primary tasks of the Managers. Demand in common parlance means the desire for an object. But in economics demand is something more than this. This means that the demand becomes effective only it if is backed by the downloading power in addition to this there must be willingness to download a commodity. Thus demand in economics means the desire backed by the willingness to download a commodity and the downloading power to pay.
Thus demand is always at a price for a definite quantity at a specified time.
Thus demand has three essentials — price, quantity demanded and time. Without these, demand has to significance in economics. Law of demand shows the relation between price and quantity demanded of a commodity in the market. A rise in the price of a commodity is followed by a reduction in demand and a fall in price is followed by an increase in demand, if a condition of demand remains constant.
Price of Appel In. Quantity Demanded 10 1 8 2 6 3 4 4 2 5. When the price falls from Rs. In the same way as price falls, quantity demand increases on the basis of the demand schedule we can draw the demand curve. There should be no substitute for the commodity 5. Law is demand is based on certain assumptions: People should not expect any change in the price of the commodity Exceptional demand curve: Some times the demand curve slopes upwards from left to right.
In this case the demand curve has a positive slope. The reasons for exceptional demand curve are as follows. This is no change in consumers taste and preferences. Income should remain constant. It is downward sloping. Prices of other goods should not change. The demand for the commodity should be continuous 7. The commodity should not confer at any distinction 6. Giffen paradox: The Giffen good or inferior good is an exception to the law of demand.
Consumers think that the product is superior if the price is high. Otherwise he will have to face starvation. At that time. Veblen or Demonstration effect: Fear of shortage: During the times of emergency of war People may expect shortage of a commodity.
As such they download more at a higher price. Speculative effect: If the price of the commodity is increasing the consumers will download more of it because of the fear that it increase still further. Factors Affecting Demand: There are factors on which the demand for a commodity depends. In the case of necessaries like rice. For example. The effect of all the factors on the amount demanded for the commodity is called Demand Function.
When the price of an inferior good falls. These factors are as follows: It the price of diamonds falls poor also will download is hence they will not give prestige. Rich people download certain good because it gives social distinction or prestige for example diamonds are bought by the richer class for the prestige it possess.
These factors are economic. Thus a fall in price is followed by reduction in quantity demanded and vice versa. Related goods can be of two types: It is not only the existing price but also the expected changes in price. Substitutes which can replace each other in use. Tastes of the Consumers: If the price of pens goes up. The effect of changes in price of a commodity on amounts demanded of related commodities is called Cross Demand.
In fact. The demand for a normal commodity goes up when income rises and falls down when income falls. Tastes include fashion. Price of the Commodity: The most important factor-affecting amount demanded is the price of the commodity. Complementary foods are those which are jointly demanded. The amount of a commodity demanded at a particular price is more properly called price demand.
This is called increase in demand. In such cases complementary goods have opposite relationship between price of one commodity and the amount demanded for the other. Income of the Consumer: The second most important factor influencing demand is consumer income. The relation between price and demand is called the Law of Demand.
Prices of related goods: The demand for a commodity is also affected by the changes in prices of the related goods also. If the taste for a commodity goes up. The opposite is called decrease in demand. The price and demand go in opposite direction. The rise in price of coffee shall raise the demand for tea. But in case of Giffen goods the relationship is the opposite. On a rainy day. Government Policy: Government policy affects the demands for commodities through taxation.
Climate and weather: Taxing a commodity increases its price and the demand goes down. On the other hand. The composition of population also affects demand. In cold areas woolen cloth is demanded. State of business: The level of demand for different commodities also depends upon the business conditions in the country. If wealth is more equally distributed. A change in composition of population has an effect on the nature of demand for different commodities.
During hot summer days.
If the country is passing through boom conditions. Increase in population increases demand for necessaries of life. Composition of population means the proportion of young and old and children as well as the ratio of men to women. Expectations regarding the future: If consumers expect changes in price of commodity in future.
The wealthier are the people. Elasticity of demand shows the extent of change in quantity demanded to a change in price. In this case. Price elasticity of demand: Marshall was the first economist to define price elasticity of demand. Income elasticity of demand 3. Price elasticity of demand measures changes in quantity demand to a change in Price. Cross elasticity of demand 1. A small change in price may lead to a great change in quantity demanded.
In-elastic demand: It is the ratio of percentage change in quantity demanded to a percentage change in price. Perfectly elastic demand: When small change in price leads to an infinitely large change is quantity demand. Price elasticity of demand 2. Types of Elasticity of Demand: There are three types of elasticity of demand: This demand curve will be flatter. Relatively elastic demand: Demand changes more than proportionately to a change in price. Perfectly Inelastic Demand In this case.
In other words the response of demand to a change in Price is nil. Relatively in-elastic demand. Quantity demanded changes less than proportional to a change in price. Unit elasticity of demand: The change in demand is exactly equal to the change in price. A large change in price leads to small change in amount demanded. Demanded carve will be steeper.
Zero income elasticity: Quantity demanded remains the same. It can be depicted in the following way: As income increases from OY to OY1. Negative Income elasticity: When income increases. Thus a change in price has resulted in an equal change in quantity demanded so price elasticity of demand is equal to unity. Income elasticity of demand: Income elasticity of demand shows the change in quantity demanded as a result of a change in income.
Income elasticity of demand may be slated in the form of a formula. Quantity demanded also increases from OQ to OQ1. Income elasticity greater than unity: Unit income elasticity: When an increase in income brings about a proportionate increase in quantity demanded. This is called a cross elasticity of demand. Quantity demanded of tea increases. Coffee and Tea When the price of coffee increases. In case of substitutes. Both are substitutes. Income elasticity leas than unity: When income increases quantity demanded also increases but less than proportionately.
The formula for cross elasticity of demand is: When income increases from OY to OY1. Cross elasticity of Demand: A change in the price of one commodity leads to a change in the quantity demanded of another commodity. Quantity demanded increases from OQ to OQ1. But the increase in quantity demanded is smaller than the increase in income.
An increase in income from OY to OY. In case of unrelated commodities. Factors influencing the elasticity of demand jntuworldupdates. Incase of compliments. A change in the price of one commodity will not affect the quantity demanded of another.
The cross-demanded curve has negative slope. When price of car goes up from OP to OP!. If increase in the price of one commodity leads to a decrease in the quantity demanded of another and vice versa. Nature of commodity: Elasticity or in-elasticity of demand depends on the nature of the commodity i. Elasticity of demand varies with time. So the demand is elastic. Demand is inelastic during short period because the consumers do not have enough time to know jntuworldupdates. Postponement of demand: If the consumption of a commodity can be postponed.
In case of commodities. On the other band. Variety of uses: If a commodity can be used for several purposes. The demand for rice or medicine cannot be postponed. On the contrary. Amount of money spent: Elasticity of demand depends on the amount of money spent on the commodity. Availability of substitutes: Elasticity of demand depends on availability or non-availability of substitutes.
If the consumer spends a smaller for example a consumer spends a little amount on salt and matchboxes. Even when price of salt or matchbox goes up.
Even if they are aware of the price change. Range of Prices: Range of prices exerts an important influence on elasticity of demand. Producers generally decide their production level on the basis of demand for the product. Elasticity of demand also helps in the determination of rewards for factors of production.
Terms of trade refers to the rate at which domestic commodity is exchanged for foreign commodities. If the demand for the product is inelastic. Importance of Elasticity of Demand: The concept of elasticity of demand is of much practical importance. This is because at a low price all those who want to download the commodity would have bought it and a further fall in price will not increase the demand.
Terms of trade depends upon the elasticity of demand of the two countries for each other goods. Public Finance: International Trade: Elasticity of demand helps in finding out the terms of trade between two countries. Similarly at a low price also demand is inelastic.
It is applicable to other factors of production. Hence elasticity of demand helps the producers to take correct decision regarding the level of cut put to be produced. At a very high price. Price fixation: Each seller under monopoly and imperfect competition has to take into account elasticity of demand while fixing the price for his product. It relates to policies regarding sales. Production may be undertaken based on expected sales and not on actual sales.
It is essential for a firm to produce the required quantities at the right time. This price forecasting helps in sale policy formulation. Demand forecasting refers to an estimate of future demand for the product. The concept of elasticity of demand enables the government to decide about nationalization of industries. Types of demand Forecasting: Based on the time span and planning requirements of business firms.
Prior information about production and sales is essential to provide additional funds on reasonable terms. Long — term forecasting: In long-term forecasting.
Long — term demand forecasting. Planning of a new plant or expansion of an existing unit depends on long-term demand. It refers to existing production capacity of the firm. Sales forecast is important for estimating revenue cash requirements and expenses. Demand Forecasting Introduction: The information about the future is essential for both new firms and those planning to expand the scale of their production.
Demand forecasting has an important influence on production planning. Short-term demand forecasting: Short-term demand forecasting is limited to short periods. It is essential to distinguish between forecasts of demand and forecasts of sales.
If the business people expect of rise in the prices of raw materials of shortages. Demand forecasts relate to production. In recent times. Similarly a multi product firm must take jntuworldupdates. Short-term demand forecasting and 2.
Short-term forecasting is essential for formulating is essential for formulating a suitable price policy. All these methods can be grouped under survey method and statistical method. This method is more useful and appropriate because the salesmen are more knowledge. Various public and private agencies all periodic forecasts of short or long term business conditions. Methods of forecasting: Several methods are employed for forecasting demand.
Expert opinion method: Apart from salesmen and consumers. Since the forecasts of the salesmen are biased due to their optimistic or pessimistic attitude ignorance about economic developments etc. Economic forecasting. In the United States of America. Industry forecasting. Option survey method.
Savage and T. When forecast are mode covering long periods. Survey methods and statistical methods are further subdivided in to different categories. Survey Method: Under this method.
It is vary difficult to forecast the production. Hence quality and competent forecasts are essential. Firm level forecasting. Economics forecasting is concerned with the economics. They are Firm level forecasting relates to individual firm.
They are cooperative. They can be important source of information. Firms in advanced countries make use of outside experts for estimating future demand.
Delphi Method: Delphi method and consumers interview methods. Small classify demand forecasting into time types. Opinion survey method: This method is also known as sales-force composite method or collective opinion method. In case of wide differences. The implementation within unbiased or their basic can be corrected. Based on post data the future data trend is forecasted. In this method. There is also a coordinator who acts as an intermediary among the panelists. Regression and correlation method: Regression and correlation are used for forecasting demand.
Those are 1 Construction Contracts awarded for building materials 2 Personal income 3 Agricultural Income. In correlation we analyze the nature of relation between the variables while in regression. Barometric Technique: Simple trend projections are not capable of forecasting turning paints. This method has been used in the area of technological forecasting. Time series analysis or trend projection methods: A well-established firm would have accumulated data.
If the functional relationship is analyzed with the independent variable it is simple correction.
This is called as time series analysis. This method relies on post data. These data are analyzed to determine the nature of existing trend.
Under Barometric method. When there are several independent variables it is multiple correlation. The results are jntuworldupdates. In the time series post data of sales are used to forecast future. Panel members one kept apart from each other and express their views in an anonymous manner. This data can be presented either in a tabular form or a graph. Consumers interview method: In this method the consumers are contacted personally to know about their plans and preference regarding the consumption of the product.
On the basis of the summary report the panel members have to give suggestions. A list of all potential downloaders would be drawn and each downloader will be approached and asked how much he plans to download the listed product in future. Both internal and external experts can be the members of the panel. At the end of each round. Macro theory on the other hand is the study of the economy as a whole.
It deals with the analysis of national income, the level of employment, general price level, consumption and investment in the economy and even matters related to international trade, Money, public finance, etc. The relationship between managerial economics and economics theory is like that of engineering science to physics or of medicine to biology.
Managerial economics has an applied bias and its wider scope lies in jntuworldupdates. Both managerial economics and economics deal with problems of scarcity and resource allocation. Management theory and accounting: Managerial economics has been influenced by the developments in management theory and accounting techniques. Accounting refers to the recording of pecuniary transactions of the firm in certain books. A proper knowledge of accounting techniques is very essential for the success of the firm because profit maximization is the major objective of the firm.
Managerial Economics requires a proper knowledge of cost and revenue information and their classification. A student of managerial economics should be familiar with the generation, interpretation and use of accounting data. Managerial Economics and mathematics: The use of mathematics is significant for managerial economics in view of its profit maximization goal long with optional use of resources.
The major problem of the firm is how to minimize cost, hoe to maximize profit or how to optimize sales. Mathematical concepts and techniques are widely used in economic logic to solve these problems. Also mathematical methods help to estimate and predict the economic factors for decision making and forward planning. Mathematical symbols are more convenient to handle and understand various concepts like incremental cost, elasticity of demand etc.
The main concepts of mathematics like logarithms, and exponentials, vectors and determinants, input-output models etc. Besides these usual tools, more advanced techniques designed in the recent years viz. Managerial Economics and Statistics: Managerial Economics needs the tools of statistics in more than one way.
A successful businessman must correctly estimate the demand for his product. He should be able to analyses the impact of variations in tastes. Fashion and changes in income on demand only then he can adjust his output. Statistical methods jntuworldupdates. Thus statistical tools are used in collecting data and analyzing them to help in the decision making process. Statistical tools like the theory of probability and forecasting techniques help the firm to predict the future course of events.
Managerial Economics also make use of correlation and multiple regressions in related variables like price and demand to estimate the extent of dependence of one variable on the other. The theory of probability is very useful in problems involving uncertainty. Managerial Economics and Operations Research: Taking effectives decisions is the major concern of both managerial economics and operations research. The development of techniques and concepts such as linear programming, inventory models and game theory is due to the development of this new subject of operations research in the postwar years.
Operations research is concerned with the complex problems arising out of the management of men, machines, materials and money. Operation research provides a scientific model of the system and it helps managerial economists in the field of product development, material management, and inventory control, quality control, marketing and demand analysis.
The varied tools of operations Research are helpful to managerial economists in decision- making. Managerial Economics and the theory of Decision- making: The Theory of decision-making is a new field of knowledge grown in the second half of this century. Most of the economic theories explain a single goal for the consumer i. But the theory of decision-making is developed to explain multiplicity of goals and lot of uncertainty.
As such this new branch of knowledge is useful to business firms, which have to take quick decision in the case of multiple goals. Viewed this way the theory of decision making is more practical and application oriented than the economic theories. Managerial Economics and Computer Science: Computers have changes the way of the world functions and economic or business activity is no exception. Computers are used in data and accounts maintenance, inventory and stock controls and supply and demand predictions.
What used to take days and months is done in a few minutes or hours by the computers. In fact computerization of business activities on a large scale has reduced the workload of managerial personnel. In most countries a basic knowledge of computer science, is a compulsory programme for managerial trainees.