Shah Abdul Latif University Khairpur Mirs

Sindh

DEPARTMENT O !OMMER!E

ASS"#NMENT
"MPORTAN!E AN# S!OPE O MANA#ER"AL E!ONOM"!S OR DE$ELOP"N# T%E !OMPET"T"$E AD$ANTA#E O T%E "RMS
Tea&her

Sir. Mumtaz Junejo Assistant Professor

Auth'r

AFAQUE BALOUCH ( !"

M(!') Previ'us Sessi'n *+,ACKNOWLEDGEMENT A summer project is a golden opportunity for learning and self development. I consider myself very lucky and honored to have so many wonderful people lead me through in completion of this project. I wish to express my indebted gratitude and special thanks to "My Teacher Mr. Mumta !unejo Assistant "rofessor " who in spite of being extraordinarily busy with his duties# took time out to hear# guide and keep me on the correct path and allowing me to carry out my assignment. $e also supported to us by showing different method of information collection. $e helped me all time when I needed and he gave right direction toward completion of assignment. I do not know where I would been without him. %urthermore# I want to thanks my all those friends who helped me in completing my assignment including my brother.

A humble &Thank you' (ir.

M)A*I*+ A*, ,)%I*ATI-* -% MA*A+).IA/ )0-*-MI0(

The terms &Managerial )conomics' and &1usiness )conomics' are often synonyms and used interchangeably in managerial studies. It is also known as &)conomics for Managers'. 1asically# Managerial )conomics is an Applied )conomics in the sphere of business management. It is an application of economic theory and methodology to decision2making problems faced by the business firms. Thus# it is the economics of business or managerial decisions or it is the process of application of principles# concepts and techni3ues and tools of economics to solve the managerial problems of business organi ations. (ome important definitions of Managerial )conomics are given below 4

5Managerial )conomics is economics applied in decision2making. It is a special branch of economics bridging the gap between the economic theory and managerial practice. Its stress is on the use of the tools of economic analysis in clarifying problems in organi ing and evaluating information and in comparing alternative courses of action.6 27. 7. $aynes

5Managerial )conomics is the integration of economic theory with business practice for the purpose of facilitating decision2making and forward planning by

management.6 2(pencer 5The purpose of Managerial )conomics is to show how economic analysis can be used in formulating business policies.6 2!oel ,ean

Characteristics/ Importance of Managerial Economics

The following points indicate the significance of the study of this subject in its right perspective. 1. It gives guidance for identification of key variables in decision-making process. !. It helps the business executives to understand the various intricacies of business and managerial problems and to take right decision at the right time. #. It provides the necessary conceptual, technical skills, toolbox of analysis and techniques of thinking and other such most modern tools and instruments like elasticity of demand and supply, cost and revenue, income and expenditure, profit and volume of production etc to solve various business problems. $. It is both a science and an art. In the context of globali ation, privati ation, liberali ation and merceri ation and a highly competitive dynamic economy, it helps in identifying various business and managerial problems, their causes and consequence, and suggests various policies and programs to overcome them.

%. It helps the business executives to become much more responsive, realistic and competent to face the ever changing challenges in the modern business world. &. It helps in the optimum use of scarce resources of a firm to maximi e its profits. '. It also helps in achieving other objectives a firm like attaining industry leadership, market share expansion and social responsibilities etc. (. It helps a firm in forecasting the most important economic variables like demand, supply, cost, revenue, price, sales and profit etc and formulate sound business polices ). It also helps in understanding the various external factors and forces which affect the decision-making of a firm. Thus, it has become a highly useful and practical discipline in recent years to analy e and find solutions to various kinds of problems in a systematic and rational manner. Knowledge of decision making and forward planning !anagerial "conomist is a specialist and an expert in analy ing and finding answers to business and managerial problems. # !anagerial "conomist has to perform several functions in an organi ation. #mong them, decision-making and forward planning are described as the two major functions and all other functions are derived from these two basic functions.

$. %ecision-making The word &decision' suggests a deliberate choice made out of several possible alternative courses of action after carefully considering them. %ecision-making is essentially a process of selecting the best out of many alternative opportunities or courses of action that are open to a management. (. )orward planning The term &planning' implies a consciously directed activity with certain predetermined goals and means to carry them out. It is a deliberate activity. It is a programmed action. *asically planning is concerned with tackling future situations in a systematic manner. )orward planning implies planning in advance for the future+ It is associated with

deciding the future course of action of a firm. It is prepared on the basis of past and current experience of a firm. "rof. , .M .Mithani has mentioned the following broad salient features of Managerial )conomics as a speciali ed discipline4

8 It involves an application of )conomic theory 9 especially# micro economic analysis to practical problem solving in real business life. It is essentially applied micro economics. 8 It is a science as well as art facilitating better managerial discipline. It explores and enhances economic mindfulness and awareness of business problems and

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managerial decisions. 8 It is concerned with firm's behavior in optimum allocation of resources. It provides tools to help in identifying the best course among the alternatives and competing activities in any productive sector whether private or public. %or the sake of clear understanding of the nature and subject matter of managerial economics# the point2wise analysis of main characteristics of managerial economics is given below4 8 Micro economic analysis4 The main part of the study of managerial economics is the behavior of business firm:s# which is micro economic unit. Therefore# managerial economics is essentially a micro economic analysis. ;nder the study of managerial economics# the problems of firm are analy ed and solved through the application of economic methods and tools. It does not study the whole economy. 8 )conomics of the firm4 According to *orman %. ,ufty# Managerial )conomics includes that portion of 5)conomics known as the theory of firm# a body of the theory which can be of considerable assistance to the businessman in his decision2making6. %or instance# the study of managerial economics includes the study of the cost and revenue analysis# price and output determination# profit planning# demand analysis and demand forecasting of a firm. As already stated earlier# the another name of managerial economics is &)conomics of the %irm.' 8 Acceptance of use < utility of macro economic variables4 In understanding the overall economic environment of an economy and its influence on a particular firm# the study and knowledge of macro economic variables or macro economics is a must. %or example# the study of Monetary# %iscal# Industrial# /abor and )mployment

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and )=IM policy# *ational Income# Inflation etc. is done in managerial economics as to know the influences of these on the business of a firm. The study of macro economic variables helps in understanding the influence of exogenous factors on business activities of a firm. 7ithout the study of important macro economic variables# proper environmental scanning is not possible. 8 *ormative approach4 Managerial )conomics is basically concerned with value judgment# which focuses on &what ought to be'. It is determinative rather than descriptive in its approach as it examines any decision of a firm from the point of view of its good and bad impact on it. It means that a firm takes only those decisions which are favorable to it and avoids those which are unfavorable to it. The emphasis is on &"rescriptive' models rather than on &,escriptive' models. 8 )mphasis on case study4 In place of purely theoretical and academic exercise# managerial economics lays more emphasis on case study method. $ence# it is a practical and useful discipline for a business firm. It diagnoses and solves the business problems. Therefore# it serves as lamp post of knowledge and guidance to business professionals : organi ations in arriving at optimum solutions. 8 (ophisticated and developing discipline4 Managerial )conomics is more refined and sophisticated discipline as compared to )conomics because it uses modern scientific methods of statistics and mathematics. *ot only this# the methods of -perational .esearch and 0omputers are also used in it for building scientific and practical models for analy ing and solving the real business problems under uncertain and risky environment. 8 Applied:1usiness )conomics4 Managerial )conomics is an application of

economics into business practices and decision2making process> therefore# it is an applied economics:business economics. The concepts of economic theory that are widely used in managerial economics are the following4

8 ,emand and )lasticity of demand 8 ,emand forecasting 8 "roduction Theory 8 0ost Analysis 8 .evenue Analysis 8 "rice determination under different market conditions:structures 8 "ricing methods in actual practice 8 1reak2even analysis 8 /inear "rogramming 8 +ame Theory 8 "roduct and "roject "lanning 8 0apital 1udgeting and Management 8 0riteria for public investment decisions 1asic concepts of Managerial )conomics:)conomic concepts applied to business analysis 8 Marginali e : Marginal "rinciple 8 Incrementalism : Incremental "rinciple

8 )3ui2Marginalism :)3ui2 Marginal "rinciple 8 ,iscounting "rinciple 8 -pportunity 0ost principle 8 .isk and uncertainty 8 "rofits 8 %irm# Industry and Market 8 )conomic and )conometric Models 8 (tudy of business environment4 1usiness environment in present world has not only become more complex# but also more dynamic. In a very complex and rapidly changing environment# making correct and timely decisions is a tedious task. Managerial )conomics helps in understanding the business environment of firms.

Scope of Managerial Economics

*+e term ,s-o.e/ in0i-ates t+e area of stu012 3oun0aries2 su3je-t matter an0 4i0t+ of a su3je-t. *+e fo55o4in6 to.i-s are -o7ere0 in t+is su3je-t.

,( O./E!T"$ES O A "RM *( DEMAND ANAL0S"S AND ORE!AST"N#

1( PRODU!T"ON AND !OST ANAL0S"S -( PR"!"N# DE!"S"ONS2 POL"!"ES AND PRA!T"!ES 3( PRO "T MANA#EMENT 4( !AP"TAL MANA#EMENT 5( L"NEAR PRO#RAMM"N# AND T%E T%EOR0 O #AMES
*+e term 5inear means t+at t+e re5ations+i.s +an05e0 are t+e same as t+ose re.resente0 31 strai6+t 5ines an0 .ro6rammin6 im.5ies s1stemati- .5annin6 or 0e-ision8ma9in6. :t im.5ies ma;imization or minimization of a 5inear fun-tion of 7aria35es su3je-t to a -onstraint of 5inear ine<ua5ities. :t offers a-tua5 numeri-a5 so5ution to t+e .ro35ems of ma9in6 o.timum -+oi-es. :t in7o57es eit+er ma;imization of .rofits or minimization of -osts. *+e t+eor1 of 6ames 3asi-a551 attem.ts to e;.5ain 4+at is t+e rationa5 -ourse of a-tion for an in0i7i0ua5 firm or an entre.reneur 4+o is -onfronte0 4it+ t+e a situation 4+ere in t+e out-ome 0e.en0s not on51 on +is o4n a-tions2 3ut a5so on t+e a-tions of ot+ers 4+o are a5so -onfronte0 4it+ t+e same .ro35em of se5e-tin6 a rationa5 -ourse of a-tion. Bot+ t+ese te-+ni<ues are e;tensi7e51 use0 in 3usiness e-onomi-s to so57e 7arious 3usiness an0 mana6eria5 .ro35ems.

6( MARKET STRU!TURE AND !OND"T"ONS 7( STRATE#"! PLANN"N#

:t .ro7i0es a frame4or9 on 4+i-+ 5on6 term 0e-isions -an 3e ma0e 4+i-+ +a7e an im.a-t on t+e 3e+a7ior of t+e firm. *+e .ers.e-ti7e of strate6i- .5annin6 is 65o3a5. :n fa-t2 t+e

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inte6ration of 3usiness e-onomi-s an0 strate6i- .5annin6 +as 6i7en rise to a ne4 area of stu01 -a55e0 -or.orate e-onomi-s.

,+( OT%ER AREAS

1. Ma-roe-onomi- mana6ement of t+e -ountr1 re5atin6 to e-onomi- s1stem2 nationa5 in-ome2 tra0e -1-5es Sa7in6s an0 in7estments an0 its im.a-t on t+e 4or9in6 of a firm. !. =no45e06e an0 information a3out 7arious 6o7ernment .o5i-ies 5i9e monetar12 fis-a52 .+1si-a52 in0ustria52 5a3or2 forei6n tra0e2 forei6n -a.ita5 an0 te-+no5o612 M>Cs etan0 t+eir im.a-t on t+e 4or9in6 of a firm. #. :m.a-t of internationa5 -+an6es2 ro5e of internationa5 finan-ia5 an0 tra0e institutions in formu5atin6 0omesti- .o5i-es of a firm.

)conomics has two major branches namely Microeconomics and Macroeconomics and both are applied to business analysis and decision2making directly or indirectly. Managerial economics comprises all those economic concepts# theories# and tools of analysis which can be used to analy e the business environment and to find solutions to practical business problems. In other words# managerial economics is applied economics The areas of business issues to which economic theories can be applied may be broadly divided into the following two categories4 8-perational or Internal issues> and 8 )nvironmental or )xternal issues Micro )conomics Applied to -perational Issues -perational problems are of internal

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nature. They arise within the business organi ation and fall within the preview and control of the management. (ome of the important ones are4 8 0hoice of business and nature of product# i.e.# what to produce> 8 0hoice of the si e of the firm# i.e.# how much to produce> 8 0hoice of technology# i.e.# choosing the factor combination> 8 0hoice of price# i.e.how to price the commodity> 8 $ow to promote sales# i.e.# sales promotion measures> 8 $ow to face price competition> 8 $ow to decide on new investment> 8 $ow to manage profit and capital> 8 $ow to manage inventory# i.e.# stock of both finished goods and raw material The above mentioned issues fall within the ambit of micro economics# therefore# the following constitute the scope of managerial economics4 Theory of demand 8 0onsumer behavior2 maximi ation of satisfaction 8 ;tility analysis 8 Indifference curve analysis 8 ,emand analysis and elasticity of demand 8 ,emand forecasting and its techni3ues:methods Theory of production and production decisions 8 "roduction function ?Inputs and output relationship@ in short2run and long2run 8 0ost and output relationship in short2run and long2run 8 )conomies and diseconomies of scale

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8 -ptimum si e of firm and determining the si e of firm. 8 ,eployment of resources ?labor and capital@ for having optimum combination of factors of production. Analysis of market structure and pricing theory 8 ,etermination of price under different market conditions 8 "rice discrimination 8 Multiple pricing policy 8 Advertising in competitive markets 8 ,ifferent pricing policies and practices "rofit analysis and profit management 8 *ature and types of profit 8 "rofit planning and policies 8 ,ifferent theories of profit Theory of capital and investment decisions 8 0ost of capital and return on capital2choice of investment projects 8 Assessing the efficiency of capital 8 Most efficient allocation of capital 8 0apital budgeting Macro )conomics Applied to 1usiness )nvironment )nvironmental issues relate to general environment in which business operates. They are related to overall economic# social and political environment of the country. The following are the main ingredients of economic environment of a country4 8 The type of economic system2 capitalist# socialist or mixed economic system. 8 +eneral trends in production# employment# income# prices# saving and investment.

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8 Aolume# composition and direction of foreign trade. 8 (tructure of and trends in the working of financial institutions2 1anks# *1%0s# insurance companies an other financial institutions. 8 Trends in labor and capital market. 8 )conomic policies of the government2 %iscal policy# Monetary policy# )=IM2 policy# Industrial policy# "rice policy etc. 8 (ocial factors2 value system# property rights# customs and habits. 8 (ocial organi ations2 Trade unions# consumer unions and consumer co2operatives and producers unions. 8 "olitical environment is constituted of the following factors4 8 "olitical system2democratic# socialist# communist# authoritarian or any other type. 8 (tate's attitude towards private sector 8 "olicy# role and working of public sector 8 "olitical stability. 8 The degree of openness of the economy and the influence of M*0s on domestic markets2 Integrations of nation's economy with rest of the world B"olicy of globali ationC The environmental factors have a far reaching influence on the functioning and performance of firm:s. Therefore# business managers have to consider the changing economic# social and political environment before taking any decision. Managerial economics is however# concerned with only the economic environment and in particular with those which form the business climate. The study of social and political factors falls out of the perview of managerial economics. It should# however#

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be borne in mind that economic# social and political factors are inter2dependent and interactive. The environmental issues mentioned above fall within fourwalls of macro economics# therefore the following constitute the scope of managerial economics4 Issues related to Macro Aariables 8 +eneral trends in economic activities of the country 8 Investment climate 8 Trends in output 8 Trends in price 2 level Bstate of inflationC 8 0onsumption level and its pattern 8 "rofitability in business expansion Issues related to %oreign Trade 8 Trade relation with other countries 8 (ector and firms dealing in exports and imports 8 )xchange rate fluctuations 8 Inflow and outflow of capital 8 Trends in international trade2 volume# composition# and direction 8 Trends in international prices of various goods and services 8 International monetary mechanism 8 .ules# regulations and policies of 7TIssues related to +overnment "olicies 8 .egulation and control of economic activities of private sector business enterprises 8 )nforcing the government rules and regulations for imposing of social responsibility

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8 (triking balance between firm's objective of profit maximi ation and society's interest 8 "olicy and regulatory measure for reducing social costs in terms of environmental pollution# congestion and slums in cities# basic amenities of life such as means of transportation and communication# water# electricity supply etc.

S mmar!"
!anagerial economics is a new and a highly speciali ed branch of economics. It brings together economic theory and business practice. It assists in applying various economic theories and principles to find solutions to business and management problems.

:t is a..5ie0 e-onomi-s an0 ma9es an attem.t to e;.5ain +o4 7arious e-onomi- -on-e.ts are usefu551 em.5o1e0 in 3usiness mana6ement. :t is a .ra-ti-a5 su3je-t. :t o.ens u. t+e min0 of a mana6eria5 e-onomist to t+e -om.5e; an0 +i6+51 -+a55en6in6 3usiness 4or50. *+e features of mana6eria5 e-onomi-s t+ro4 5i6+t on t+e nature of t+e emer6in6 su3je-t an0 t+e s-o.e 6i7es information a3out t+e 4i0e -o7era6e of t+e su3je-t. *+e -on-e.ts of 0e-ision8 ma9in6 an0 for4ar0 .5annin6 are t+e t4o 3asi- fun-tions of a mana6eria5 e-onomist. :n a 4a1 t+e entire su3je-t matter of mana6eria5 e-onomi-s is to 3e un0erstoo0 in t+e 3a-96roun0 of t+ese t4o fun-tions

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