managerial economics ch 1

7/23/2019 Managerial Economics Ch 1

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Dr. Karim Kobeissi


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Chapter 1: Introduction to Managerial Economics


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K e y w o r d : T h e o r y o f T h e i r m

A microeconomic concept founded in neoclassical economics

that states that rms exist and make decisions in order to

maximize prots. Businesses interact with the market to

determine pricing and demand and then allocate resources

according to models that look to maximize net prots.

The theory of the rm goes along with the theory of the consumer,

which states that consumers seek to maximize their overall utility.

Modern takes on the theory of the rm sometimes distinguish

etween long!run motivations "sustainaility# and short!run

motivations "prot maximization#.


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Managerial Economics ! De"nition

Managerial economics is concerned with the

application of economic tools and

methodologies to the decision making process

within the rm. $t seeks to estalish rules to

facilitate the attainment of the desired

economic aim of management. These economic

aims relate to costs, revenue and prots.


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Economics# $usiness Management and

Managerial Economics


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Managerial %conomics ridges the gap

etween purely analytical prolems

dealt within economic theory and

decision prolems faced in real

usiness and thus helps out in making

rational choices to yield maximum

return out of minimum e&orts and

resources y making the est selection

among alternative course of action.


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Managerial Economics ! Importance

Business and industrial enterprises aim at earning

maximum prots. $n order to achieve this o'ective, a

managerial executive has to employ decision making. A

sound decision re(uires fair knowledge of the aspects

of economic theory and the tools of economic analysis,

which are directly involved in the process of decision!

making. )oncerned with such aspects and tools of


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Managerial Economics % Importance &con'

The importance of managerial economics

relies in the following points:*. $t provides tool and techni(ues for managerial decision

making.

+. $t gives answers to the asic prolems of usiness

management.

. $t supplies data for analysis and forecasting.

-. $t provides tools for demand forecasting and prot

planning.

. $t guides the managerial economist.


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Managerial Economics ! (atureThe whole ody of economics may e divided into two segments

3 Microeconomics and Macroeconomics. Microeconomics

is concerned with smaller part of the economy such asa "rm &e.g.# )upply and demand# pricing of output# Coststructure' while macroeconomics is concerned with thewhole economy &e.g. +D,# unemployment# in-ation#"scal and monetary policies# business cycles'.

Although, managerial economics falls within microeconomics as

it is concerned with the prolems of an individual rm4

however, it incorporates certain aspects of the macroeconomic

theory ecause the manager should have a comprehensive

understanding of the environment in which his rm is working

efore analyzing alternatives or taking decisions.


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%conomics in its roadest sense means what economists do. They

provide solutions to various economic prolems "in1ation,

unemployment etc#. The one main root cause of all economic

prolems is )C/CIT0 and managerial economics is the use ofeconomic analysis to mae business decisions involving the est

use of organization5s scarce resources. 6uman wants are virtually

unlimited and insatiale and economic resources to satisfy them are

limited which give rise to choices " decisions# etween what to

produce, how to produce and for whom to produce.


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What kind and how many products should e

produced7

Howshould these products e produced "production

model8technology#7

For whom should these products e produced

"targeted segments#7


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%conomic 9ecisions for the :irm

;hat< The product decision = egin or stop providing

goods and8or services.

6ow< The hiring, sta>ng, procurement, and capital

udgeting decisions.

:or whom< The market segmentation decision =

targeting the most enecial customers.


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)cope of Marginal Economics

1! Demand nalysis and orecasting:

A rm is an economic organization which transforms inputs into output that is

to e sold in a market. Accurate estimation of demand, y analyzing the

forces acting on demand of the product produced y the rm, forms the

vital issue in taking e&ective decision at the rm level.

A ma'or part of managerial decision making depends on accurate estimatesof demand. ;hen demand is estimated, the manager does not stop at the

stage of assessing the current demand ut estimates future demand as

well. This is what is meant y demand forecasting.

This forecast can also serve as a guide to management for maintaining or

strengthening market position and enlarging prot. 9emand analysis helps

in identifying the various factors in1uencing the demand for a rm5s

product and thus provides guidelines to manipulate demand. The main

topics covered are< 9emand 9eterminants, 9emand 9istinctions and


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2! Cost nalysis:

)ost analysis is yet another function of managerial economics. $ndecision making, cost estimates are very essential. The factors

causing variation in costs must e recognized if management

is to arrive at cost estimates which are signicant for planning

purposes. The determinants of estimating costs, the

relationship etween cost and output, the forecast of cost and

prot are very vital to a rm. An element of cost uncertainty

exists ecause all the factors determining costs are not always

known or controllale. Managerial economics handles these

aspects of cost analysis as an e&ective knowledge and the

application of which is corner stone for the success of a rm.


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3! ,roduction nalysis:

?roduction analysis fre(uently proceeds in physical terms. $nputsplay a vital role in the economics of production. The factors of

production otherwise called inputs, may e comined in a

particular way to yield the maximum output. Alternatively,

when the price of inputs shoots up, a rm is forced to work out

a comination of inputs so as to ensure that this comination

ecomes the least cost comination. The main topics covered

under cost and production analysis are production function,

least cost comination of factor inputs, factor productiveness,

returns to scale, cost concepts and classication, cost!output

relationship and linear programming.


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4! In5entory Management :

An inventory refers to a stock of raw materials which a rmkeeps. @ow the prolem is how much of the inventory is the

ideal stock. $f it is high, capital is unproductively tied up. $f

the level of inventory is low, production will e a&ected.Therefore, managerial economics will use such methods as

%conomic rder uantity "%# approach, AB) analysis

with a view to minimizing the inventory cost. $t also goesdeeper into such aspects as motives of holding inventory,

cost of holding inventory, inventory control, and main

methods of inventory control and management.


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6! d5ertising :

To produce a commodity is one thing and to market it isanother. Cet the message aout the product should reach the

consumer efore he thinks of uying it. Therefore,

advertising forms an integral part of decision making and

forward planning. %xpenditure on advertising and related

types of promotional activities is called selling costs y

economists.

There are di&erent methods for setting advertising udget

managerial economics ch 1

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