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Old 27-07-2011, 02:46 PM
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Exclamation Magnerial economic notes 2



Managerial economics refers to the integration of economic theory with business practice. It deals with application of economic principle to the problems of business firms it modifies or reformulates already existing economic models to suit the specific conditions and serve the specific problem of the business firms .it helps to solve real complex business problems using other related branches.

According to Prof. Joel Dean “The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies”

Nature of Managerial Economics :

  • It aims in providing help in making decisions by the firms as it draws heavily on the propositions of macro economics
  • It assists the firm in forecasting as macro economics studies the economy at the aggregate level .It also helps to identify the level of demand at some future point based on the relationship between level of national income & demand for a particular product
  • It helps on those propositions which are likely to be useful to the management, as decision has to be made without delay. Besides more accurate forecast may not justified on cost considerations
  • Managerial economics prescriptive in nature and character. It recommends that which should be done on alternative conditions. E.g. if the distribution of income has become more uneven it is stated without indicating what should be done to correct this phenomenon.
  • Managerial economics to an extent is an applied science e.g. empirical study may suggest that for every one percent raise in expenditure on advertising the demand for the product shall increase by 0.5% .

Scope of Managerial Economics

Demand analysis and forecasting :

Demand forecasting is the process of finding the values for demand in future time period. The current values are needed to make optimal current pricing and promotional policies, while future values are necessary for planning future production inventories, new product development etc. Correct estimates of demand is essential for decision making , strengthening market position and enlarging profits. Regression analysis is one of the most common methods of estimating an economic variables which are explanatory variables with the view to estimate and credit the average value of dependent variable.

Cost and Production Analysis:

Production deals with the physical aspects of the business investment. It is the process whereby inputs are transformed into outputs. Efficiency of production depends on ratio in which various inputs are employed absolute level of each input and productivity of each input. A production function is the relation which gives us the technically efficient way of producing the output given the inputs. Actually cost is the monetary side of production . Given the production function, one can go for cost estimation and forecasting. While the former refers to the present period cost levels, cost forecasting refers to the levels of cost in a future period. The firm must undertake cost estimation and forecasting to judge the optimality of present output levels and assess the optimal level of production in future.

Inventory Management:

It refers to stock of raw materials which a firm keeps. If it is high, capital is unproductively tide up which might, if stock of inventory is reduced, be used for other productive purpose . On the other hand, if the level of inventory is low, production will be hampered. Hence, managerial economics with methods such as ABC analysis a simple simulation exercise and some mathematical models with a view to minimize inventory cost. It also helps in aspects of inventory control and cost of carrying them.


Managerial economics helps in determining the total advertising cost and budget, the measuring of economic effects of advertising and form an integral part of decision making and forward planning.
Market Structure and Pricing Policies:

Managerial economics helps to clear surplus and excess demand to bring market equilibrium as there is continuos changes in market. Success of business firm depends on correctness of price decisions. Price theory works according to the nature of the market depending on the number of sellers, demand conditions etc.

Resource Allocation:

Managerial economics with the help of advanced tools such as linear programming are used to arrive at the best course of action for the maximum use of the available resources and its substitutes.

Capital Budgeting:

Capital is scarce and it costs something . Hence, managerial economics helps in decision making and forward planning on allocation of capital to various factors of productions , marketing and management.

Investment Analysis:

It involves planning and control capital expenditure. Whether or not to invest funds in purchase of assets or other resources in an attempt to make profit and how to choose among completing uses of funds. Managerial economics help in analysis and decision making on the investment of funds.

Risk and Uncertainty Analysis:

As business firm have to operate under conditions of risk and uncertainty both decision making and forward planning becomes difficult. Hence managerial economics helps the business firm in decision making and formulating plans on the basis of past data, current information and future prediction.
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