Page 9 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 4. Investment problems: Forward planning involves investment problems. These are problems
of allocating scarce resources over time. For example, investing in new plants, how much
to invest, sources of funds, etc.
Study of economics essentially involves the analysis of certain major subjects like:

1. Demand analysis and methods of forecasting
2. Cost analysis
3. Pricing theory and policies

4. Profit analysis with special reference to break-even point
5. Capital budgeting for investment decisions

6. The business firm and objectives
7. Competition.
Demand analysis and forecasting help a manager in the earliest stage in choosing the product
and in planning output levels. A study of demand elasticity goes a long way in helping the
fi rm to fi x prices for its products. The theory of cost also forms an essential part of this subject.
Estimation is necessary for making output variations with fixed plants or for the purpose of new

investments in the same line of production or in a different venture. The firm works for profi ts

and optimal or near maximum profits depend upon accurate price decisions. Theories regarding

price determination under various market conditions enable the firm to solve the price fi xation
problems. Control of costs, proper pricing policies, break-even point analysis, alternative profi t

policies are some of the important techniques in profit planning for the firm which has to work

under conditions of uncertainty. Thus managerial economics tries to find out which course is

likely to be the best for the firm under a given set of conditions.

Economics and other Disciplines
Economics is linked with various other fields of study like:

1. Operation Research: This field is used in economics to find out the best of all possibilities.

Operation Research is a great aid in decision making in business and industry as it can help
in solving problems like determination of facilities on machine scheduling, distribution of
commodities, optimum product mix, etc.
2. Theory of Decision-making: Decision theory has been developed to deal with problems of
choice or decision making under uncertainty, where the applicability of fi gures required
for the utility calculus are not available. Economic theory is based on assumptions of a
single goal whereas decision theory breaks new grounds by recognising multiplicity of
goals and persuasiveness of uncertainty in the real world of management.

3. Statistics: Statistics helps in empirical testing of theory. With its help better decisions
relating to demand and cost functions, production, sales or distribution are taken.
Economics is heavily dependent on statistical methods.

4. Management Theory and Accounting: Maximisation of profit has been regarded as a

central concept in the theory of the fi rm in microeconomics. In recent years, organisation
theorists have talked about “satisficing” (a decision-making strategy that attempts to meet

criteria for adequacy, rather than to identify an optimal solution) instead of “maximising”
as an objective of an enterprise. Accounting data and statements constitute the language
of business. In fact, the link is so close that “managerial accounting” has developed as a

separate and specialised field in itself.

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