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.

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, price discrimination, 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 it suggests 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).

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 one in 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 the forces 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.