Module 1
- 1. MODULE 1 INTRODUCTION TO ECONOMICS
- 2. Role and Responsibilities Of a Managerial Economist In Business Ref: Mithani: page no. 6 to 8 P.L. Mehta: page no. 8 to 12
- 3. Market research Preparation of business forecast Capital budgeting & choice of investment Production scheduling Briefing the management on current domestic & global issues Minimize the cost of production Security management analysis
- 4. Advice on foreign exchange market Analyze environmental factors.
- 5. RELATIONSHIP OF MANAGERIAL ECONOMICS WITH FUNCTIONAL AREAS OF BUSINESS
- 6. M.E. & ECONOMICS M.E. described as economics applied to decision making Special branch bridging gulf b/w pure economic theory & managerial practice Microeconomics – main source of concepts & analytical tools for M.E. Macroeconomics – responsible in the area of forecasting for M.E.
- 7. Contd… Economic concepts useful & frequently applied – Price Elasticity of Demand – Income Elasticity of Demand – Opportunity Cost – Theory of the Firm – Demand Theory – Theory of International Trade – Money & Banking, etc.
- 8. M.E. & Statistics M.E. requires collection of quant data which can be used to measure certain functional relationships for making decisions For example, pricing decisions Uncertainty of future events solved by Theory of Probability
- 9. M.E. & Mathematics Metric in Character; estimates economic relationships Predicting relevant economic quantities to use them in making decisions and forward planning Knowledge of Geometry, Trigonometry & Algebra with Logarithms, Exponentials, Vectors, Determinants & Matrix Algebra, Differential & Integral Calculus are very essential to M.E.
- 10. M.E. & Accounting Closely related; concerned with recording the financial operations of a business firm Accounting info – one of the principal sources of data required for making decisions For example, Profit & Loss Statement of a firm Main task is to provide data; applying ideas of M.E. to solve problems
- 11. M.E. & OR Important problems solved with OR techniques Problems – – Allocation problems – Competitive problems – Waiting Line problems – Inventory problems
- 12. FUNDAMENTAL PRINCIPLES OF MANAGERIAL ECONOMICS
- 13. Opportunity Cost Attributed to alternative uses of scarce resources Natural & Man-made resources are scarce in relation to demand to satisfy needs, wants; have alternative uses For Example, a firm has 100 million & it has three alternatives – Expand size of firm – Set up a new production unit – To buy shares in another firm
- 14. Contd… Expected Annual Returns from the alternatives 20 million, 18 million & 16 million Rationally alternative 1 is the best Hence the 2nd alternative has to be sacrificed The returns of 18 million is called annual opportunity cost of an annual income of 20 million Opportunity Cost of availing an opportunity is the expected income foregone from the 2nd best opportunity of using the resources
- 15. Incremental Cost Applied to business decisions involving a large increase in total cost & revenue Incremental costs are costs arising due to business decision For example, setting up a new plant by a firm. This decision increases the total cost from 100 to 115 million
- 16. Contd… 3 major components – Present explicit costs – Opportunity costs – Future costs Fixed & Variable Cost Depreciation & advertising cost
- 17. Time Perspective All decisions taken with a certain time perspective It refers to duration of time period from the relevant past to the foreseeable future while making a decision Relevant past – period of past experience & trends for long run decisions All decisions do not have same time perspective For example, decision to buy explosive materials for manufacturing characters – short run time perspective Investment in plants, building, machinery, land, etc. – long run repercussions Should assess & determine in advance & make decisions accordingly
- 18. Contd… For example, setting up a new Management Institute, short time perspective would be unwise and for buying explosive materials a long run one would be unwise
- 19. Discounting A rupee tomorrow is worth less than a rupee today For example, suppose a person is offered to make a choice between a gift of Rs. 100 today or Rs. 100 next year The question is “How much money today is equal to Rs 100 one year hence?” The Rs. 100 would have to be discounted at 8 percent
- 20. Contd… If a decision affects costs and revenues at future dates, it is necessary to discount the costs & revenues to present values before a valid comparison of alternatives is possible
- 21. Equi-Marginal Principle Originally associated with consumption theory It suggests that available resources should be so allocated b/w alternative options that the MPG from the various activities are equalized For example, a firm has a total capital of 100 million; option of spending on three projects