Post on 29-Jan-2016
description
Copyright © Amity University1
PAN African eNetwork Project
DBM
Economic Analysis
Semester - I
Sonia Singh
Copyright © Amity University
This topic deals with:
• The nature and scope of Managerial Economics as a whole.
• The place of Managerial economics in the Economics discipline.
• How do managers make their decisions?
Decision making process
Copyright © Amity University
Economic Mysteries
• Why have paper towels replaced hot-air hand dryers in public restrooms?
• Why do prices of some goods, like apples, go down during months of heaviest consumption, while others like beachfront cottages, go up?
Copyright © Amity University
What is Economics?
Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance need of economics arises because of –
a) Unlimited wants
b) Scarce resources with alternative uses
Copyright © Amity University
Microeconomics –
The study of the decisions of people and businesses and the interaction of those decisions in markets. The goal of microeconomics is to explain the prices and quantities of individual goods and services.
Copyright © Amity University
Some Managerial Decisions
• Resource allocation within the organization in the short- and long-run
• Expanding or contracting production and distribution facilities
• Developing and marketing new products
• Capital expenditures including the possible acquisition of other firms
Copyright © Amity University
Macroeconomics -
• The study of the national economy and the global economy and the way that economic aggregates grow and fluctuate. The goal of macroeconomics is to explain average prices and the total employment, income, and production
Copyright © Amity University
Macroeconomics vs. Microeconomics MICROECONOMIC QUESTION MACROECONOMIC QUESTION
Go to business school or take a job? How many people are employed in the economy as a whole?
What determines the salary offered by Citibank to, a new Columbia MBA?
What determines the overall salary levels paid to workers in a given year?
What determines the cost to a university or college of offering a new course?
What determines the overall level of prices in the economy as a whole?
What government policies should be adopted to make it easier for low-income students to attend college?
What government policies should be adopted to promote full employment and growth in the economy as a whole?
What determines whether Citibank opens a new office in Shanghai?
What determines the overall trade in goods, services and financial assets between the U.S. and the rest of the world?
Copyright © Amity University
Copyright © Amity University
Economic Theory
• Microeconomics– Study of the economic behavior of individual
decision-making units.– Relevance to Managerial Economics
• Macroeconomics– Study of the total or aggregate level of output,
income, employment, consumption, investment, and prices for the economy viewed as a whole.
Copyright © Amity University
Economic Methodology
• Economic Models– Abstract from details– Focus on most important determinants of
economic behavior – cause and effect
• Evaluating Economic Models– A model is accepted if it predicts accurately
and if the predictions follow logically from the assumptions.
Copyright © Amity University
Decision Sciences
• Mathematical Economics– Expresses and analyzes economic models
using the tools of mathematics.
• Econometrics– Employs statistical methods to estimate and
test economic models using empirical data.
Copyright © Amity University
The Use of Economic Models
Positive Economics:-
Derives useful theories with testable propositions about WHAT IS.
Normative Economics:-
Provides the basis for value judgements on economic outcomes.WHAT SHOULD BE
Copyright © Amity University
Market Mechanism
Copyright © Amity University
Managerial Economics
• Manager– A person who directs resources to achieve a stated
goal.
• Economics– The science of making decisions in the presence of
scare resources.
• Managerial Economics– The study of how to direct scarce resources in the
way that most efficiently achieves a managerial goal.
Copyright © Amity University
Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization.”
Pappas & Hirschey - “Managerial economics applies economic theory and methods to business and administrative decision-making.”
Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”
Copyright © Amity University
These Definitions Cover a Number of Different Approaches
1. Analysis based on the theory of the firm
2. Analysis based upon management sciences
3. Analysis based upon industrial economics
Copyright © Amity University
MANAGERIAL ECONOMICS
The application of economics’ theories and principles in managerial problems with the purpose of optimization of decision making.
Decision making involves the activities regarding production, distribution and consumption.
Copyright © Amity University
The use of Economic Analysis in management is to make business decisions involving the best use (allocation) of scarce resources.
Copyright © Amity University
Economic Theory helps managers to collect the relevant information and process it in order to arrive at the optimal decision.Given the goals of a firm, a decision is OPTIMAL if it brings the firm closest to its goals
Copyright © Amity University
Management Decision Problems
•Product Price and Output•Production Technique•Stock Levels•Advertising Media and intensity•Labor hiring and firing•Investment and Financing
Copyright © Amity University
The Process of decision-making
Identify objectivesDefine the problemIdentify possible solutionsSelect the best possible
solutionImplement the decision
Copyright © Amity University
Nature of Decision
•What goods shall firm produce? •How should firm raise the necessary capital and what shall be its legal form. •What technique shall be adopted, and what shall be the scale of operations? •Where production is located? •How shall its product be distributed? •How shall resources be combined? •What shall be the size of output? •How shall it deal with its employees?
Copyright © Amity University
Types of Decision
•Organizational and personal decisions •Basic and routine decisions
•Programmed and non-programmed decisions.
Copyright © Amity University
Conditions Affecting Decision Making
•Certainty
•Risk
•Uncertainty
Copyright © Amity University
Economic Conditions
•Market Structure•Supply and Demand conditions•State of Technology•Govt. Regulations•International Dimensions•Future Macroeconomic factors
Copyright © Amity University
Decision Making Model
•The Classical Model
•The Administrative Model
Copyright © Amity University
The Classical Model
•The manager has completed information about the decision situation and operations under a condition of certainty. •The problem is clearly defined, and the decision-maker has knowledge of all possible alternatives and their outcomes.
Copyright © Amity University
•Through the use of quantitative techniques, rationality, and logic, the decision-maker evaluates the alternatives and selects the optimum alternative -the one that will maximize the decision situation by offering the best solution to the problem.
Copyright © Amity University
The Administrative Model
•The manager has incomplete information about the decision situation and operates under a condition of risk or uncertainty. •The problem is not clearly defined, and the decision-maker has limited knowledge of possible alternatives and their outcomes. •The decision-maker satisfies by choosing the first satisfactory alternative- one that will resolve the problem situation by offering a good solution to the problem.
Copyright © Amity University
Tools of Decision Making
•Marginal Analysis•Linear Programming•Game Theory•Optimization•Forecasting
Copyright © Amity University
Market Interactions
• Consumer-Producer Rivalry– Consumers attempt to locate low prices, while
producers attempt to charge high prices.
• Consumer-Consumer Rivalry– Scarcity of goods reduces the negotiating power of
consumers as they compete for the right to those goods.
• Producer-Producer Rivalry– Scarcity of consumers causes producers to
compete with one another for the right to service customers.
• The Role of Government– Disciplines the market process.
Copyright © Amity University
Cost-Benefit Approach to Decision Making
• C(X) = Cost of doing activity X
• B(X) = Benefit of doing activity X
• If B(X) > C(X) then do X
Copyright © Amity University
Theory of the Firm
Expected Value Maximization Owner-managers maximize short-run profits. Primary goal is long-term expected value
maximization. Constraints and the Theory of the Firm
Resource constraints. Social constraints
Limitations of the Theory of the Firm Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient
managers.
Copyright © Amity University
Role of Business in Society Why Firms Exist
Business is useful in satisfying consumer wants.
Business contributes to social welfare Social Responsibility of Business
Serve customers. Provide employment opportunities. Obey laws and regulations.
Copyright © Amity University
The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making
Copyright © Amity University
The Concept of Business and the Concept of Profit
Business
An organization that provides goods or services to earn profits
Profits
The difference between a business’s revenues and its expenses
Copyright © Amity University
Economic Systems Around the World
Economic System
A nation’s system for allocating its resources among its citizens
Copyright © Amity University
Factors of Production
Resources used in the production of goods and services
Resources used in the production of goods and services
Four traditional factors of production:
1. Natural Resources
2. Labor
3. Capital
4. Entrepreneurs
Newer perspectives include:
5. Physical Resources
6. Information Resources
Newer perspectives include:
5. Physical Resources
6. Information Resources
Copyright © Amity University
Factors of Production
Natural Resources
Materials supplied by nature (such as land, water, mineral deposits, and trees)
Labor (or Human Resources)
Physical and mental capabilities of people as they contribute to economic production
Capital
Funds needed to create and operate a business enterprise
Copyright © Amity University
Factors of Production
Entrepreneur
Person who starts a new business or makes the decisions that expand a small business
Physical Resources
Tangible things organizations use in the conduct of their business
Information Resources
Data and other information used by a business
Copyright © Amity University
Types of Economic Systems
Planned Economy
Centralized government controls all or most factors of production and makes all or most production and allocation decisions
Market Economy
Individuals control production and allocation decisions through supply and demand
Copyright © Amity University
Planned Economies
Communism
Planned economic system in which the government owns and operates all major sources of production
Socialism
Planned economic system in which the government owns and operates selected major sources of production
Copyright © Amity University
Market EconomiesMarket
Mechanism for exchange between buyers and sellers of a particular good or service
Input Market
Firms buy resources from supplier households
Output Market
Firms supply goods and services in response to demand on the part of households
Capitalism
Market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive
Copyright © Amity University
“Pure Market Economy”
1-45
OUTPUT MARKETSGoods
Services
INPUT MARKETSLabor
CapitalEntrepreneurs
Physical ResourcesInformation Resources
HOUSEHOLDS• Demand products in
output markets• Supply resources in
input markets
FIRMS• Supply products in
output markets• Demand resources
in input markets
DEMANDDEMAND
DEMANDDEMAND SUPPLYSUPPLY
SUPPLYSUPPLY
Copyright © Amity University
Mixed Market Economies
Privatization
Process of converting government enterprises into privately owned companies
Socialism
Planned economic system in which the government owns and operates only selected major sources of production
Economic system featuring characteristics of both planned and market economies Economic system featuring characteristics of both planned and market economies
Copyright © Amity University
Marginal Principle
• To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC
• MB > MC means the last unit of the control variable increased benefits more than it increased costs
• MB < MC means the last unit of the control variable increased costs more than it increased benefits
Copyright © Amity University
Marginal AnalysisThe marginal cost of any good or
activity is its opportunity costThe opportunity cost is the next best
alternative given up when a decision is made?
What is your opportunity cost for being here today?
Is it the same for everyone in this room?
Copyright © Amity University
Should you keep your business open for one additional hour?
– Scenario: You are managing a fast food hamburger restaurant.
– You currently close at 10 pm every night, but are considering extending your hours to 11 pm on weekends.
– What are the relevant considerations?
Copyright © Amity University
Your monthly rent?
Other sunk costs?
The hourly wages you pay your employees?
Other variable costs associated with the extra hour?
Your weekly revenues?
Your likely revenues for the extra hour?
Copyright © Amity University
Skills required for subject
• Logical and intuitive thinking
• Interpretation of graphs
• Mathematics
The main thinking tool = MODELS
Reduce complex situations to their fundamentals to develop general principles
Copyright © Amity University
The Modern economy
• Economy - A mechanism that allocates scarce resources among alternative uses. This mechanism achieves five things: What, How, When, Where, Who.
• Decision makers - Households, Firms, Governments.
Copyright © Amity University
The Basic Decision-Making Units
• A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.
• .
Copyright © Amity University
• Households are the consuming units in an economy
• Firm : A many-layered organization that sets laws and rules, operates a law-enforcement mechanism, taxes households and firms, and provides public goods and services such as national defense, public health, transportation, and education.
•
Copyright © Amity University
Other important decision makers
• An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.
• Market - Any arrangement that enables buyers and sellers to get information and to do business with each other.
Copyright © Amity University
The Invisible Hand
• Decentralized
• Freedom
• Self-interest
• Motivated by incentives
Copyright © Amity University
ECONOMIC SYSTEMS
•LAISSEZ-FAIRE ECONOMIES: THE FREE MARKET
•laissez-faire economy Literally from the French: “allow [them] to do.” An economy in which individual people and firms pursue their own self-interests without any central direction or regulation.
Copyright © Amity University
The Complexity of the Modern Economy• A market economy is self-organising in the sense that when
individuals act independently to pursue their own self-interest, responding to prices set on open markets, they produce co-ordinated and relatively efficient economic activity.
Resources and Scarcity• Scarcity is a fundamental problem faced by all economies because
not enough resources - land, labour, capital, and entrepreneurship - are available to produce all the goods and services that people would like to consume.
• Scarcity makes it necessary to choose among alternative possibilities: what products will be produced and in what quantities.
Copyright © Amity University
Who Makes the Choices and How• Modern economies are based on the specialisation and
division of labour, which necessitate the exchange of goods and services.
• Exchange takes place in markets and is facilitated by the use of money.
• Much of economics is devoted to a study of how markets work to co-ordinate millions of individual, decentralised decisions.
• Three pure types of economy can be distinguished: traditional, command and free market.
• In practice, all economies are mixed economies in that their economic behaviour responds to mixes of tradition, government command, and price incentives.
Copyright © Amity University
•consumer sovereignty The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
•Consumer Sovereignty
Copyright © Amity University
•Distribution of Output
•The amount that any one household•gets depends on its income and wealth.Income is the amount that a household earns each year. It comes in a number of forms: wages, salaries, interest, and the like.•Wealth is the amount that households have accumulated out of past income through saving or inheritance.
Copyright © Amity University
Questions
Copyright © Amity University
According to the text, the reason to study economics is
• A)
to learn a way of thinking. •
B)
to understand society and global affairs. •
C)
to be an informed voter. •
D)
All of the above •
Answer:D •
Copyright © Amity University
Among the fundamental concepts in economics are
• A) opportunity cost. •
B) marginalism. •
C) efficient markets. •
D)All of the above •
Answer: D
Copyright © Amity University
Which of the following is the best definition of economics?
• A) The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
•B)The study of how consumers spend their income.
•C) The study of how business firms decide what inputs to hire and what outputs to produce.
•D) The study of how the federal government allocates tax dollars.
•Answer:A
Copyright © Amity University
Which of the following statements is NOT correct?
• A)Economics is a behavioral science. •
B) In large measure, economics is the study of how people make choices.
•C) If poverty were eliminated there would be no reason to study economics.
•D) Economic analysis can be used to explain how both individuals and societies make decisions.
•Answer: C
Copyright © Amity University
The study of economics
• A) is a very narrow endeavor. •
B) is a way of analyzing decision-making processes caused by scarcity.
•C) is concerned with proving that capitalism is better than socialism.
•D) focuses on how a business should function.
•Answer: B
Copyright © Amity University
Which of the following is an example of a normative statement? • A)
The unemployment rate is six percent. •
B) There should be no unemployment in an advanced industrial society.
•C) Higher prices cause consumers to buy less.
•D) Equilibrium price implies that quantity demanded equals quantity supplied.
•Answer:
B
Copyright © Amity University
Which of the following is an example of a positive statement?
• A) There should be no unemployment in an advanced industrial society.
•B) Higher prices cause consumers to purchase less.
•C)
Consumption should be distributed fairly in society. •
D)
People should pollute as little as possible. •
Answer: B
Copyright © Amity University
• Resources are unlimited in a wealthy society. •
Answer:
• True
False •
A= F
Copyright © Amity University
The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units is
• A) positive economics.
•B)normative economics.
•C) macroeconomics.
•D) microeconomics.
•Answer: D
Copyright © Amity University
Inflation and unemployment
• A) are the focus of normative economics.
•B) are a focus of microeconomics.
•C) are a focus of positive economics.
•D) are a focus of macroeconomics
Ans = D
Copyright © Amity University
Review Terms and Conceptsceteris paribus
descriptive economics
economic growth
economic theory
economics
efficiency
efficient market
empirical economics
equity
Industrial Revolution
macroeconomics
marginalism
microeconomics
model
normative economics
opportunity cost
positive economics
scarce
stability
sunk costs
variable
Copyright © Amity University
The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making
Copyright © Amity University
The role of managerial economics in managerial decision making
The role of managerial economics in managerial decision making
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures and pricing
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures and pricing
Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Game theory
Optimisation
Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Game theory
Optimisation
Managerial Economics
Use of economics concepts and decision making tools to solve managerial decision problems
Managerial Economics
Use of economics concepts and decision making tools to solve managerial decision problems
Optimal solutions Optimal solutions
Thank You
76
Please forward your query To: sonia23singh@gmail.com
CC: manoj.amity@panafnet.com