Page 9 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes

Caselet Importance of Economics in our Life

conomics is the study of how finite resources are consumed by demand, according
to the costs imposed by their supply in relation to that demand. In other words,
Eeconomics tells us that a freeze in Florida that damages the orange crop will cause
the price of orange juice to change and how the price will modify demand over time.
History

Modern economic theory is said to have originated in "The Wealth of Nations," a book
written by Scottish scholar Adam Smith in 1776. The theory holds that rational self interest
pursued by individuals and businesses in a free market society leads to optimal economic
conditions.
Significance
The study of economics helps formulate an understanding of the effects of financial actions
and reactions by individuals and institutions. This understanding allows the projection of
future economic conditions based on current indications.

Misconceptions
An understanding of economics assists governments in managing macroeconomic
conditions such as limiting a recession by inducing recovery. However, economic theory
is not foolproof because it is a social science based on the interplay between culture and
money. Economic effects change as cultural customs change.
Source: www.ehow.com/facts_5899581_importance-economics-life.html

1.3 Scope of Managerial Economics

Managerial economics is concerned with the application of economic concepts and analysis to
the problem of formulating rational managerial decisions. There are four groups of problem in
both decision making and forward planning.

1. Resource allocation: Scarce resources have to be used with utmost efficiency to get optimal
results. These include production programming, problem of transportation, etc.
2. Inventory and queuing problem: Inventory problems involve decisions about holding of
optimal levels of stocks of raw materials and finished goods over a period. These decisions
are taken by considering demand and supply conditions. Queuing problems involve
decisions about installation of additional machines or hiring of extra labour in order to
balance the business lost by not undertaking these activities.

3. Pricing problems: Fixing prices for the products of the firm is an important part of the
decision making process. Pricing problems involve decisions regarding various methods
of pricing to be adopted.
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.

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