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Economics assignment

Scope and significance of managerial economics

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Managerial economics as defined by Edwin Mansfield is "concerned with

application of the economic concepts and economic analysis to the problems

of formulating rational managerial decision. It is sometimes referred to as

business economics and 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, calculus.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,mathematical programming, game theory for strategic decisions, and other

computational methods.

Managerial decision areas include:

assessment of investible funds

selecting business area

choice of product

determining optimum output

determining price of product

determining input-combination and technology

sales promotion.

Almost any business decision can be analyzed with managerial economics

techniques, but it is most commonly applied to:

Risk analysis - various models are used to quantify risk and asymmetric

information and to employ them in decision rules to manage risk.

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Production analysis - microeconomic techniques are used to analyze

production efficiency, optimum factor allocation, costs, economies of scale

and to estimate the firm's cost function.

Pricing analysis - microeconomic techniques are used to analyze various

pricing decisions including transfer pricing, joint product pricing, pricediscrimination, price elasticity estimations, and choosing the optimum

pricing method.

Capital budgeting - Investment theory is used to examine a firm's capital

purchasing decisions

Scope of Managerial economics

Managerial economics to a certain degree is prescriptive in nature as itsuggests course of action to a managerial problem. Problems can be related

to various departments in a firm like production, accounts, sales, etc.

Demand decision

Production decision

Theory of exchange or Price Theory

Demand decision:-Demand refers to the willingness to buy a commodity.

Demand, here, defines the market size for a commodity i.e. who will buy the

commodity. Analysis of the demand is important for a firm as its revenue,

profits, income of the employees depend on it.

Production decision:-A firm needs to answer four basic questions - what

to produce, how to produce and how much to produce and for whom to

produce.

What to produce?

A firm will produce according to its perception of the customer

demand. It can either produce consumer goods like food, clothing etc.

(which are for consumption purpose) or it can produce capital goods

like machinery etc. (which are for investment purposes).

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How to produce?

Goods can be produced by certain techniques. Firms have the option of

producing goods by labour intensive technique and capital intensive

technique. Labour intensive technique is the one in which manual

labour is used to produce goods. Capital intensive technique is the onein which machinery like forklift, assembly belts etc. are used to

produce goods.

How much to produce?

A firm has to decide its production capacity and also how much of their

good a consumer needs and produce accordingly.

For whom to produce?

A firm has to decide its target population (i.e. to whom they will serve

products and/or services). Example, it will not be viable to produce

luxurious goods or middle income or low income group if they can't

afford it and produce basic necessity goods for rich class if they don't

need it. Therefore, a firm needs to match its produce according to the

target population it is serving.

Theory of exchange or Price Theory:An economic theory that contends

that the price for any specific good/service is the relationship between theforces of supply and demand. The theory of price says that the point at

which the benefit gained from those who demand the entity meets the

seller's marginal costs is the most optimal market price for the good/service.