Traditional Economics and Managerial Economics_Lecture 1-4

7/30/2019 Traditional Economics and Managerial Economics_Lecture 1-4

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EconomicsFather of Economics: Adam Smith, in 1776, in his

pioneer book, The Nature and Causes of Wealth of

Nation, he mentioned that Economics is a subject matterof production and growth of wealth of a nation.

David Ricardo: Emphasized that Economics is asubject matter of distribution ofwealth.

Robinson in 1931, in his bookNature and Significanceof Economic Science, emphasized that economics is asubject matter of scarcity.

He has emphasized on certain important points such as:

Unlimited wants

Scarce means

Alternative use of means

Proper allocation of resources


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Recent Definition of Economics:

Econom ics is a branch of social sc ience

wh ich stud ies the product ion, consum pt ion anddist r ibut ion of goods and serv ices in an

economy.

So Economicsconcentrates on:

Product ion

What to produce?

How to produce?

For whom to produce?

Consumpt ion of goods and serv ices

Distr ibut ion


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Types of Economics:1. Pos it ive and Normative Econom ics:

Positive economics concerned with

explaining what it is, that is, it describes theoriesand laws to explain the observed economicphenomenon.

On the other hand, the normative

economics concerned with what should be or whatought to be.

More specifically, it is a body ofsystematized knowledge relating to criteria of whatought to be and concerned with the ideal asdistinguished from actual.

Moreover, the normative economicsinvolves value judgments or what are simply knownas values. It stress upon what is good and what is

bad.


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2. In modern economics, the subject matter of economicsis divided into two broad categories such as:

Micro-Economics Macro Economics

The term micro-economicsderived from the

Greek ward MIKROS meaning SMALL and the

term macro-Economicsderived from the Greek ward

MACROSmeaning LARGE.

Thus, M icro-economicsdeals with the analysis

of small individual units of the economy such asindividual consumer, individual firms and small

aggregates or group of individuals such as various

industries and markets.


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Macro-economics on the other hand, is

concerned with the economic activity in large. It analyses

the behavior of the whole economic system in totality or

entirety. It studies the behavior of the large aggregates

such as total employment, the national product or income,

the general price level of the economy. Therefore, macro-

economics is known as aggregate economics.Professor Boulding says, macro-economics

deals not with individual quantities as such but with the

aggregate of these quantities, not with individual income

but with the national income, not with the individual pricebut with the price level, not with individual outputs but

with nationalproduct.


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Besides, we have some important

classification of specialized traditional

economic branches, such as:3. Development Econom ics:

This branch of economics deals with

The factors that determine economic developmentand growth of a country,

The causes of under-development, poverty in less

developed countries,

Problems faced by these countries,

And the policies to achieve high level of economic

growth and employment.


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4. Public Economics:

This branch of economics has been specialized:

To underscore the economic role of thegovernment.

To find out the sources of government revenues.

To look at governments fiscal policy To measure the effects of taxation and public

expenditure.

To evaluate the causes and consequences ofbudgetary and fiscal deficits.

And, finally, to look after the public sector

economic activities.


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5.Monetary Economics:

It studies the monetary effects of the

country including demand for and supply ofmoney, working of the money market, creditand financial system, management ofmonetary systems.

6. International Economics:It studies the causes and

consequence of international trade in goods

and services, international flow of capital,international monetary and financialinstitutions, balance of payments andinternational payment systems.


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7. Industrial Economics:

This branch is concerned with the working,

growth and structure of the industrial sector (Firm andIndustries) of the country.

It also deals with the management and

organization of the industries, and problems and prospects

of the industrial growth.

8. Labour Economics:

It examines the problems faced by labour as an

economic class and problems associated with labour

organizations, labour productivity and wages, exploitation

of labour, labour welfare schemes, and labour laws and

their effects.


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9. Econometrics:

It is a combined study of statistics and

mathematical techniques applied to economic data withview to testing hypothesis.

More specifically, it is study to quantify the

relationship, if any, between the dependent and

independent variables and to measure the effects of

economic policies.

10. History of Economic Thought:

It is the study of evolution and development ofeconomic thoughts and ideas, their backgrounds, logic

and flaws. It contributes to the understanding of economic

science.


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11. Regional economics:

It studies:

The development of various regions of the country.

It looks into the causes of imbalance in regional

development.

It examines why growth of urban economy is faster than

that of rural economy.

12. Financial Economics:

This branch is concerned with the development

and working of financial sector, especially the financialinstitutions that cater to the financial requirement of the

industries and of the capital markets.

It also studies how fluctuations in the financial

sector effects the working and growth of industrial sector.


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13. Environmental Economics:

It examines how industrial growth

affects, rather destroys, natural environment

of the country.It also studies how world industrial

growth affects the global environment and

causes global worming, and hence, affectsclimatic conditions.


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14. Managerial Economics:

Manager ial economicsis however, an integration ofboth micro economic and macro economic aspects. It is

that branch of economics which serves as a link betweenabstract theory and managerial practice.

According to Mcnair and Merian, managerialeconomics is the use of economic modes of thought to

analyze business situation.

According to Spencer and Siegelman, managerialeconomics is the integration of economic theory withbusiness practice for the purpose of facilitating decision

making and forward planning by management.

Hague defined managerial economics as a fundamentalacademic subject which seeks to understand and toanalyze the problems of business decision making.


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Basic Features of Managerial Economics:

Managerial economics is concerned with decision making

of economic nature. This implies that managerialeconomics deals with identification of economic choices

and allocation of scarce resources.

Managerial economics isgoal oriented and perspective. It

deals with how decisions should be made by managers toachieve the organizational goal.

Managerial economics is pragmatic. It concerned with

those analytical tools which are useful in decision making.

Managerial economics is both conceptual and

methodological. It provides some well developed tools

and methods to verify the economic concepts, which

helps the managers in decision making.


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Finally, managerial economics provides a link between

traditional economics and decision sciences for

managerial decision making. This can be better

understood by the help offollowing diagram:

Managerial

Economics

Decision

Sciences (Tools

and Techniques

of Analysis)

Decision

Problem

Optimal Solution to

Business Problem

Traditional

Economics


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Nature ofManagerial Economics: Managerial economics is concerned with the business

firm and the economic problems that every businessmanagement need to solve.

More specifically,

Managerial economics is micro economic in nature,

where the unit of study is firm. Managerial economics is concerned with normative

micro economics rather positive micro economics. Innormative micro economics, the manager should think

what should happen rather what does happen to thefirm. More specifically, the managerial economics tellus what objectives a business should pursue and howthey should be set.


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Managerial economics concentrate on making economictheory more application oriented. While traditionaleconomics tries to solve the complicated theoreticalissues, managerial economics tries to introducecomplication s which the economist ignores by

assuming them away. Hence, it is more pragmatic.

Managerial economics also concentrates on macroeconomic aspects to understand the economy as awhole. More specifically, it tries to see how the

aggregate economy or Government intervention affectsthe business situation.


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Chief Characteristics of Managerial Economics:

The main characteristics of managerialeconomics are as follows:

Managerial economics is micro-economic in characteras it concentrates on the study of firm.

Managerial economics also takes the help of macroeconomics to understand and adjust the environment in

which the firm operates. It is normative rather than positive economics

It is both conceptual and methodological.

The concept of managerial economics is mainly based

onthe

theory offirm

. It is only for the analysis ofprofits that helps in taking of the the theory ofdistribution.

Knowledge of managerial economics helps in makingwise decisions/choices, which helps the managers to

allocate the scarce resources properly.


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Importance of Managerial Economics:

In order to make managers more competitive and

efficient, the managerial economics provides anumber of tools and techniques. With the help of

such models/techniques, the managers can

capture the essential relations builds in the

economy.

Managerial economics provides the important

concepts such as concept ofelasticity of demand,

fixed and variable costs, short run and long run

costs, opportunity costs, net present values etc.

to understand and solve the business problems.


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Managerial economics is helpful in making

decisions like:

What should be the product-mix?

What should be the production technique and

input mix that is least costly? What should be the level of production and the

price for the product?

How to take investment decisions?

What should be firms advertisement?

How to allocate advertisement fund between

different media?


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Scope of Managerial Economics:

Managerial economics closely connected with

the economic theory i.e. both micro and macroeconomics, operation research, mathematics, statistics

and decision making.

Managerial economics also draws together and

related ideas from various functional areas ofmanagement like production, marketing, finance and

accounting, project managementetc.

An efficient and competent managerialeconomist has to integrate all such concepts and ideas to

understand and analyze practical managerial problems.


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As far as managerial economics is concerned,

thefollowing aspects constitute its subject matters:

Objective of business firm.

Demand analysis and demand forecasting.

Production and costs.

Competition: Perfect; Monopoly; Monopolistic and

Oligopoly.

Pricing and output.

Profit.

Investment and capital budgeting.

Product policy, sales promotion and market strategy.


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Managerial Economics and Other Important Areas:

Traditionally, managerial economics drew heavily uponeconomic analysis for its decision making process.

But lately, the development of mathematical and statisticaltechnique for analyzing situation faced by a managerialeconomist have also promoted their use in decision making

process. These are:

1. Managerial Economics and Traditional Economics: It helps the managers to understand the market conditions and

the general economic conditions/environment with which firmoperates.

To provide clues to understand and analyze the resourceallocation problem.

It deals with efficiency concepts such as technical efficiency,allocative efficiency and the economic efficiency as well.


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2. Managerial Economics and OperationResearch:

To take effective decisions.

To solve the decision related problems.

Its time consuming and costly matter (negativepoints).

3. Managerial Economics and Mathematics:

The relationship helps the managers in:

Providing tools and methodologies.

Provides mathematical tools/models to analyze theeconomic concepts such as geometry, algebra,calculus, vector and determinants, input-output

tables etc.


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4. Managerial Economics and Statistics:

To quantify the past economic activity and topredict the future course.

To understand and solve the decision makingproblem by averages, dispersion, probabilities,index numbers etc.

5. Managerial Economics and the Theory ofDecision Making:

Helps to decide whether maximization of profit for

the firm or maximization of utility for theconsumer.

To find the solution that balances the conflictingobjectives.


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Role of Managerial Economics in Business:

Managing decisions and processing informations are

two primary tasks of managers. The task of organizing and processing informations

and then making intelligent decisions can make two

important forms, such as:

Task of taking specific decisions by managers.

General tasks to carry out a course of action that

furthers the goal of the organization.

Specific Objectives: Production scheduling

Demand forecasting

Market research


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Economic analysis of the industry

Investment appraisal

Security management analysis

Advice on foreign exchange management

Advice on trade

Pricing and related decisions

Analysis and forecasting environmental factors

General Tasks:

Business is influenced by two sets of decisions like:

External factors

Internal factors


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External Factors:

General Economic Conditions: This includes:

The level and rate of growth of national income.

Regional income distribution, Influence of international factors on the domestic economy,,

The business cycles etc.

Demand for the product:This suggests,

Is there a change occurring in the purchasing power of the public ingeneral or in some particular region?

Is this change in purchasing power a result of change in populationand migration or due to change in real income of the people as a

result of price level change? Are fashion, taste, and preferences undergoing any change and thus

affecting the demand for the products?

The managerial economist tries to find their roots andadvises accordingly.


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Factors influencing the input costs of the firm:For example:

What about the cost of labour in different regions and for

different operations? What about the credit conditions in the market?

Is there going to be some change in the government creditpolicy?

How different inputs can be combined to minimise the cost ofproduction?

Market Conditions:Here a manger has to understand the nature of the

market from which the firm is buying the raw materials and ofthe market where it is selling its output. This understandinghelps the manager to recommend the pricing policysuccessfully.


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Firms share in the market:

The managerial economist can also help in the

expansion of the firms share in the market. He is to findout the opportunities and the policies which help in the

expansion of the firms share in the local and internal

markets. This, he can do by understanding the nature and

trend of the demand.

Governments economic policies:

Besides, the manager has to keep in touch with

the govt.s economic policies and the Central banksmonetary policies, annual budget of the government etc.


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Internal Factors:

Production, sales, inventory schedules of the firm:

The manager helps in deciding about theproduction, sales and inventory schedules of the firm. He

not only provides informations regarding their present

level but also forecast their future trend.

Investment decisions:

for this, the managerial economist needs to

forecast the return on the investment and the cost that the

firm incurs by taking up the investments.Pricing and profit policies etc.


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Traditional Economics and Managerial Economics_Lecture 1-4

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