Managerial theory provides necessary conceptional tools which can be of considerable help to the manager in taking scientific decisions. Are fashions, tastes and preferences undergoing any change and thus affecting the demand for the product? For example, a farmer may be required to choose between a guaranteed price achievable by selling his crop at a price fixed now in the futures market prior to harvest and an unknown price based on supply and demand immediately after the harvest. Similarly, future sales and profits of the firm must be projected within the constraints of the growth and development of the national economy. However, what is specially relevant for the pricing decision of the firms is the type of product market in which it operates. . Means first drew attention to the divergence of interests between owners and managers.
Certainly the goals of these organizations do not involve profit maximization, but they do involve economic efficiency. Scope of Marginal Economics 6. Because Firm A, the shirt maker, competes against many another shirt makers, it's involved in what economists describe as. While microeconomics is the study of decisions made regarding the allocation of resources and prices of goods and services, macroeconomics is the field of economics that studies the behavior of the economy as a whole i. Managers not onlyassess the current demand but he has to take into account the future demand also. Its stress is on the real commercial world. Business decisions are greatly influenced by pervading market structure and the structure of markets that has been evolved by the nature of competition existing in the market.
Managerial Economics and Decision Making One has to observe the economic prospects of a particular before venturing into it. Nature of Managerial Economics: Following points constitute nature of managerial economics 1. Though statistical methods are the handmaid of managerial economics, they should be used with care. In a profit-seeking organization, benefits are measured as revenue and costs expenses and money is used as the common denominator of both. The manager doing the forecasting has to make a detailed demand analysis. Economics contributes a lot to the managerial economics. Economics is a study of men as they live, behave move and think in the ordinary business of life.
Managerial economics has a close linkage with other disciplines and fields of study. His focus on long term trends helps maximise profits and ensures the ultimate success of the firm. Baumol argued on the basis of his experience as a management consultant that maximization of sales rather than maximization of profits is a common managerial goal, and perhaps more appropriate. Under cost analysis we will take intoaccount determinants of costs, method of estimating costs, the relationship between cost andoutput, the forecast of the cost, profit, these terms are very vital to any firm or business. Making a decision is one of the most difficult tasks faced by a professional manager.
Economic theory and theory of decision making appear to be in conflict, each based on different set of assumptions. Both the methods are interdependent and hold an equally important place in any scientific analysis. Decision making is both a managerial function and an organisational process. Executives make many types of decisions connected with the business such as production, inventory, cost, marketing, pricing, investment and personnel. Relation to Other Branches of Knowledge 8. For example, some of the alternative capital investment projects may involve lines methods of production which are unknown to management.
At the other end are inductionist empiricists who believe that science must construct its axioms from the same data and particularly by ascending continually and gradually till it finally arrives at the most general axioms. Business decisions about the future require the businessmen to choose among alternatives, and to do this, it is necessary to know the costs involved. Small business owners and managers make decisions that affect everyday operations and long-term profitability. If the level of inventory is low, production will be affected. It is often asked what the method of science is, whether induction or deduction? Original reasoning forces manager to examine the changes in total revenues and total costs resulting for changes in production, sales, price and related decisions. A managerial economist helps the management by using his analytical skills and highly developed techniques in solving complex issues of successful decision-making and future advanced planning. For the rationalists, there stands at the head of the system, a set of self-evident propositions and it is from these that other propositions theorems are derived by the process of reasoning.
Purpose of Managerial Economic Theory : Economic theory is nothing but a way of thinking about problems, a logical system for processing and utilizing information. For example, to understand concentration of economic power, one must understand the Lorentz curve, to understand predatory pricing, it is necessary to understand the meaning of market power and the logic of average cost mark up pricing. It also goes deeper into such aspects as motives of holding inventory, cost of holding inventory, inventory control, and main methods of inventory control and management. Relation of Managerial Economics to Other Areas of Management 5. Linear programming deals with those programming problems where the relationship among the variables is linear. Following are the steps helps to managers while taking decisions. The goal of a university would be to educate as many students as possible subject to certain acceptable standards.
It all depends on how the decision maker puts the problem, how he formalizes the objectives, considers the appropriate alternatives, and finds out the most preferable course of action. The fact that a business entity is influenced by the conditions is uncertainty about the future and due to the changes in the business environment resulting complexities in business decisions. But legal analysis focuses on illegal actions such as collusion or restrictive trade practices such as a tie-in sales or full line forcing. Should a firm continue to be in business in an industry in which it is currently engaged. At some point, though, the sheer amount of information you gather may feel as though it's overwhelming you. Methods such as regression analysis, differential calculus, linear programming, cost- benefit analysis are used to arrive at the optimal course.
The subject matter of business economics, as such should utilize economic analysis that can be helpful in solving business problems, policy and planning. Investment decision covers issues like the decisions regarding the amount of money for capital investment, the source of financing this investment, allocation of this investment among different projects over time. They construct models that partly reflect the complexity of the real world and face up to the bounds of human rationality. Business economics is comprised of several tools of micro and macro economic analysis which are useful in management decision-making that act as facilitators to solve business problems. Two points must be noted in this definition. The electronic gadgets will enable the manager to understand business problems in a better perspective and increase his ability to solve the business problems facing him in the management of business. Various cost analysis exercises are carried out by the cost accountants and industrial engineers.
This text is designed to help the student learn basic economic theory and to allow him to practice business using economics in order to become a competent professional decision maker and manager. If each department or division of the company operates independently, the marketing department would most certainly choose to sell that quantity that maximized revenue, production department would choose that quantity for which cost would be minimum, the financial department would choose the least costly way of raising corporate capital and the law department would seek to minimize the degree of risk taking. He must be alert to new developments both economic and political in order to appraise their possible effects on business. In the entire process of management and in each of the management activities such as planning, organising, leading and controlling, decision making is always essential. Thus economics is of significant use in modern business as decision making is the core of business and the success in the business depends on right decisions. Nonetheless, economic theory does help in arriving at a better decision.