Managerial

1. Chapter One:
1. THE NATURE AND SCOPE OF MANAGERIAL
ECONOMICS
What is Managerial Economics?
=>Managerial economics (ME) constitutes economic theories and
analytical tools that are widely applied to business decision
 Economics is a social science, it studies how households, firms,&
nations, etc make decision to allocate their resources between
competing needs of society so that economic welfare of the society can
be maximized
 However, choice-making is not so simple as it looks because the
economic work is very complex and most economic decisions have to
be taken under the conditions of imperfect knowledge, risk and
uncertainly.
 Thus economists in their endeavor to study the complex decision
making process have developed analytical tools, techniques and
economic theories with the aid of mathematics and statistics

2. Relationships between Managerial Economics and Related
Disciplines
 ME is the integration of economics theory (application of Economics theory)
with business practice for the purpose of facilitating decision making and
forward planning by management.
 It uses analytical tools and a set of concepts to provide effective ways of
thinking about decision problem
Economic concepts
Ex. Theory of market
structure and pricing
Decision sciences /
tools
Ex. optimization
Managerial
Economics
Management Decision
Problem
Optimal solution to managerial decision
problem

3. 1.1 IMPORTANCE OF MANAGERIAL ECONOMIC
FOR MANAGERS in Agribusiness
 Since Agribusiness is part of the economy devoted to the
production, processing, and distribution of food, including the
financial institutions that fund these activities;
 First, it provides a framework for evaluating whether resources
are being allocated efficiently with in the firm.
 It helps to identify the alternative means of achieving the given
objectives, and then to select the alternative that accomplishes
the objective in the most resource efficient manner, for
example to determine if profit could be increased by substitute
labor (variable cost) by technology (fixed cost)

4. 1.2 IMPORTANCE ME…
Second, these principles help managers to respond to various
economic signals. For example, an increase in prices of the
output would be the appropriate signal to increase an output
=>In Agribusiness market forces which affect the process of
price determination, either directly or indirectly may be termed
as ‘market forces’.
=>The forces may be tangible, like the quantity and arrival at a
particular point of time in the market or heavy rainfall; or
Intangible like the announcement of government policy.
=>All these factors affect the price determination by affecting
either the demand behavior of the buyers or the supply
behavior of the sellers

5. 1.2 SCOPE OF ME &THE BUSINESS
ENVIRONMRNT
`o Business Environment has reference to the broad
characteristics of the economic system in which the business
firm operates
o For example, the overall economic policies, social factors and
political atmosphere of the nation. Managerial economics,
however, concerned with only the economic environment, and
in particular with those economic factors which form the
business climate.
Some concept on Micro & Macro economics
o Micro Economics focuses on individual economic behavior
(individual households) and firms and their interaction in the
market where resources are costly, e.g., how consumers
respond to changes in prices and income, how businesses
decide on employment and sales.

6. 1.2 SCOPE OF ME &THE BUSINESS…
o On the other hand, macro economics deals with the aggregate
economic variables or the economic system as a whole. It
addresses question like the effect of changes in investment,
government spending, employment, exchange rates, and
inflation, unemployment, and import and export policies.
o It shows how fiscal and monetary policies can keep the
aggregate system working well
=> The scope of managerial economics to managerial issues
is more limited to microeconomics.
=>It should be thought with respect to micro economics
focusing on those topics like demand, production, cost,
pricing, and market structure

7. 1.3 ECONOMIC DECISIONS
o Making an optimal economic decision is a very difficult task
for most managers.
o There is always a problem of choice when two or more
alternative courses of action are variable.
 The act of choice signifying solution of an economic
problem is economic decision making.
o Since economic theories state general relationship between
two or more economic events, they provide consistency in
analysis, which helps in arriving at right conclusions.
 However, economic decision will be less risky to the
extent the probability of the occurrence of the future events
is correctly estimated.

8. 1.3 ECONOMIC DECISIONS ……
o Economic decisions or business decisions are numerous in
number and various in form most of these decision have got an
economic content.
o Managers of profit –seeking firms are faced with a wide range
of important decisions in the areas of pricing, product choice,
cost control, advertising, capital investments, and dividend
policy, to name a few.
– Managers in the not-for-profit and the public sectors are
faced with a similarly wide range of decisions. For
example, how to allocate funds among such competing
needs like travel expenses, phone services, secretarial
support, and the like.
– Longer- range decisions may focus on new facilities, new
programs, the purchase or lease of office equipments, and
the decision to establish an executive training center.

9. 1.3 ECONOMIC DECISIONS
Some of the business decisions, which have economic content,
are discuss as follow
Profit decision: as we see later on maximizing of profit is the
objective of the firm. Profit decision may include decisions
about level of profit, rate of profit reinvestment.
Demand decision: the management of the firm has to estimate
current and future demands for the output produced by the
firm. It helps to allocate existing resources efficiently.
Production decision: demand decision followed by production
decision. The decision may include what, how, when and to
whom produce. Moreover the decision goes to what should be
the scale of production? What should be the product mix?

10. 1.3 ECONOMIC DECISIONS
Price and output decisions: such decisions focus on in what
price and in what quantity are the products sold in the
commodity market in order to maximize the firm’s profit?
Investment decision: the major issues related to such decision
may be how much to invest? What should be the rate of
investment? Or choice of investment projects.

11. 1.4 DECISION SYSTEMS AND PROCESS
 The ability to make good decisions is the key to successful
managerial performance.
 The success of every decision depends mainly on decision
process.
 Decision process refers to the procedure of making decision it
involves co-ordination on the time scale, present problem, past
date and future action.
 Decision process in each of those areas of decision shares a
number of common elements and basically it includes five
steps.

12. 1.4 DECISION SYSTEMS AND PROCESS….
This five-step decision-making process is illustrated in figure
Establish and/or identify
objectives
Define the problem
Identity possible
alternative solutions
Evaluate
alternatives and
select the best
Implement and monitor the
decision
Consider societal
constraints
Consider organizational and
input constrains

13. 1.4 DECISION SYSTEMS AND PROCESS….
First, the decision maker must establish or identify the objectives of
the organization. The failure to identify organizational objectives
correctly can result in the complete rejection of a well-convinced
and well-implemented plan.
Next, the decision maker must identify the problem requiring a
solution.
Third, once the source(s) of the problems is (are) identified, the
manager can move to an examination of potential solutions.
=>To provide potential solutions collection of data available
facts and figures are important. If for example, the problem is the
use of technologically inefficient equipment, two possible
solutions may be proposed updating and replacing the plant’s
equipment or building a completely new plant.
.

14. 1.4 DECISION SYSTEMS AND PROCESS….
=>The choice between these alternatives depends on the relative
data on cost and benefit, as well as other constraints that may
make one alternative preferable to another
Fourth, formulation of a model (a model is an analytical tool that
helps for making decision under different situation). After all
alternatives have been identified and evaluated the best
alternatives have been chosen using the model.
The final step in the process is the implementation of the
decision. This phase often requires constant monitoring to
ensure that results are as expected. If they are not, corrective
action needs to be taken when possible.