Nature and Scope Essay

The Nature and Scope of Managerial Economics Dr. Mohammad Abdul Mukhyi, SE. , MM Economics is the social science that studies the production, distribution, and consumption of goods and services. Managerial economics (sometimes referred to as business economics), is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear).

If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for example through the use of operations research and programming. 4/18/2010 Managerial Economic 2 1 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. /18/2010 Managerial Economic 3 The Global Trade Economy The Metropolitan Bioregional Economy Organic & Specialty Agriculture Local Commerce (locally produced goods and services) Construction (Housing, etc. ) Education (basic, life management, citizenship) Basic & Holistic Health Care & Education Hand Crafts Arts Sports Child Care Elder Care Home & Yard Care Sustainable Land Use Employment Security Education (basic, life management, citizenship) Urban Environment & Social Welfare Services Conservation & Recreation Local Philanthropy Market Sectors

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Commodity Agriculture (wheat, rice, soybeans, beef, coffee, bananas, etc. ) Electronics Vehicles High Tech Health Care, Pharmaceuticals Hardware Mass Produced Clothing, Cloth Goods Hydrocarbon-Based Energy Financial Services Short term R Public Goods (The “Commons” ) Global Ecology Fair Trade Policies National Defense Long Range R Catastrophic Reinsurance (health, disasters, etc. ) Coordination of Health, Education, Welfare (Information and infrastructure investments) Major (Corporate, Foundations, etc. ) Philanthropy Bernard Lietaer and Art Warmoth, © 1999 /18/2010 Managerial Economic 4 2 4/18/2010 Managerial Economic 5 How Is Managerial Economics Useful? Evaluating Choice Alternatives Identify ways to efficiently achieve goals. Specify pricing and production strategies. Provide production and marketing rules to help maximize net profits. Making the Best Decision Managerial economics can be used to efficiently meet management objectives. Managerial economics can be used to understand logic of company, consumer, and government decisions. 4/18/2010 Managerial Economic 6 3 Definisi:

Managerial economic refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently. The scope of managerial economics: – Economic sciences – Decision sciences – Other science having an effect on to decision making. 4/18/2010 Managerial Economic 7 SCOPE & IMPORTANCE OF MANAGERIAL ECONOMICS: Out of two major managerial functions served by the subject matter under managerial economics are decision making and forward planning: Lets explore the scope for decision making: 1.

Decision relating to demand. 2. Decision related to Cost and production. 3. Decision relating to price and market. 4. Decision relating to profit management. 5. Macro economic factor. 4/18/2010 Managerial Economic 8 4 Relationship to economic theory 1. Micro economic 2. Macro economic Penekanan: 1. Normative economic 2. Positif economic Relationship to the decision sciences Ilmu ekonomi memberikan kerangka teoritis pengambilan kepusuan manajerial untuk membentuk model-model keputusan, menganalisis pengaruh serangkaian tindakan alternatif dsan mengevaluasi hasil-hasil yang diperoleh. /18/2010 Managerial Economic 9 Relatioinship to the functional areas of business Administration studies. Bidang Fungsional Akuntansi, keuangan, pemasaran, personalia, produksi Bidang alat Akuntansi, sistem informasi manajemen, ekonomi manajerial, perilaku organisasi, metode kuantitatiff, riset operasional, statistik, matematik. Perbankan, asuransi, bisnis internasional, regulasi Kebijakan perusahaan, ekonomi manajerial Managerial Economic 10 Bidang khusus Mata kuliah terpadu 4/18/2010 5 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. 4/18/2010 Managerial Economic 11 Economic vs. Accounting Profits Accounting Profits Total revenue (sales) minus dollar cost of producing goods or services Reported on the firm’s income statement Economic Profits Total revenue minus total opportunity cost 4/18/2010 Managerial Economic 12 6

Opportunity Cost Accounting Costs The explicit costs of the resources needed to produce produce goods or services Reported on the firm’s income statement Opportunity Cost The cost of the explicit and implicit resources that are foregone when a decision is made Economic Profits Total revenue minus total opportunity cost 4/18/2010 Managerial Economic 13 Why Do Profits Vary Among Firms? Disequilibrium Profit Theories Rapid growth in revenues. Rapid decline in costs. Compensatory Profit Theories Better, faster, or cheaper than the competition is profitable. 4/18/2010 Managerial Economic 14 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. 4/18/2010 Managerial Economic 15 4/18/2010 Managerial Economic 16 8 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 4/18/2010 Managerial Economic 17 The Theory of The Firm Model dasar perusahaan bisnis teori perusahaan Tujuan : mamaksimisasi kekayaan atau nilai perusahaan (nilai sekarang = PV). PV = ?1 (1 + i) n 1 + ?2 (1 + i) 2 + …. + ?n (1 + i) n PV = ? t =1 ?t (1 + i) t n Nilai = ? TR t ? TC t (1 + i) t t =1 Managerial Economic 18 4/18/2010 9 Constraint on the operation of the firm

Constraint : 1. Sumberdaya 2. Kuantitas dan kualitas output 3. Hukum 4/18/2010 Managerial Economic 19 Firm Valuation The value of a firm equals the present value of all its future profits PV = S pt / (1 + i)t If profits grow at a constant rate, g ; i, then: PV = po ( 1+i) / ( i – g), po = current profit level. Maximizing Short-Term Profits If the growth rate in profits ; interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits. 4/18/2010 Managerial Economic 20 0 Marginal (Incremental) Analysis Control Variables Output Price Product Quality Advertising R Basic Managerial Question: How much of the control variable should be used to maximize net benefits? 4/18/2010 Managerial Economic 21 Net Benefits Net Benefits = Total Benefits – Total Costs Profits = Revenue – Costs 4/18/2010 Managerial Economic 22 11 Marginal Benefit (MB) Change in total benefits arising from a change in the control variable, Q: MB = DB / DQ Slope (calculus derivative) of the total benefit curve 4/18/2010 Managerial Economic 23

Marginal Cost (MC) Change in total costs arising from a change in the control variable, Q: MC = DC / DQ Slope (calculus derivative) of the total cost curve 4/18/2010 Managerial Economic 24 12 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 4/18/2010 Managerial Economic 25

The Geometry of Optimization Benefits & Costs Slope =MB B C Slope = MC Costs Benefits Q* 4/18/2010 Managerial Economic Q 26 13 Literatur Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc. , 2008 Dominick Savatore, Managerial Economic, Oxford University Press, 2007 Mark Hirschey, MANAGERIAL ECONOMICS 11th Edition 4/18/2010 Managerial Economic 27 Problem 1.

Review the decision criteria that you took into account in choosing your college or university; in what sense was the choice a managerial decision? … an entrepreneurial decision? 2. Explain how the existence of multiple possible goals may be accommodated in a decision analysis. 3. 3. Explain how the achievement of profit in the business firm may be a by-product of other activities rather than an object of direct pursuit; what are the managerial implications? 4/18/2010 Managerial Economic 28 14


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