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DR Hiranmoy Roy

Managerial economics refers to applying economic theory and decision science tools to help organizations achieve their objectives efficiently. Management decision problems arise in any organization when seeking goals subject to constraints. The basic decision making process involves defining the problem, determining objectives, identifying solutions, selecting the best solution, and implementing it. The objective of a firm is to maximize profit, but profit over what period? It is assumed the goal is to maximize the present discounted value of all future profits.

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Pratik Sharma
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59 views11 pages

DR Hiranmoy Roy

Managerial economics refers to applying economic theory and decision science tools to help organizations achieve their objectives efficiently. Management decision problems arise in any organization when seeking goals subject to constraints. The basic decision making process involves defining the problem, determining objectives, identifying solutions, selecting the best solution, and implementing it. The objective of a firm is to maximize profit, but profit over what period? It is assumed the goal is to maximize the present discounted value of all future profits.

Uploaded by

Pratik Sharma
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Dr Hiranmoy Roy

Managerial / Business Economics:


Business/ Managerial Economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Management Decision

Economic Theory Micro Economics Macro Economics

Decision Science Mathematical Economics, Econometrics

Managerial Economics Application of Economic Theory and Decision Science tools to solve management Decision problems Optimal Solution To Managerial Decision Problems
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Management Decision Problems arise in any organization be it firm, a not-forprofit organization (such as hospital or university), or a Govt. agency when it seeks to achieve some goal or objective subject to some constraints. The goals and constraints may differ from case to case, but basic decision making process is the same.
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Relationship to Economic Theory: Economic theories seek to explain and predict economic behavior. For example, the theory of firm assumes that the firm seeks to maximize profits and on the basis of that it predicts how much of a particular commodity the firm should produce under different forms of market structure or organization.
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Methods of Expressing Economic Relationship: Economic relationship can be expressed in the form of equations, tables or graphs. When the relationship is simple a table or graph may be sufficient. When the relationship is complex however, expressing the relationship equational form may be necessary.

Optimization: Optimization by total revenue, total cost.


Optimization by Marginal Principle, Constrained Optimization.

New Management tools for Optimization (a) Benchmarking (b) TQM (c) Reengeering (d) Learning Organization.
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Basic Process of Decision Making 1. Define Problem

2. Determine the Objectives


3. Identify Possible Solutions 4. Select the Best Possible Solution 5. Implement the Decision
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Objective and Value of the Firm


1. Efficient Management 2. Optimal Decision Making .It requires goal or objective to be established 3. Objective of the Firm is to maximize profit 4. But Profit in which period? This year? Next five years? 5. Managers observed making decision that reduce current

years profit to increase profit in future years

Exp. on R &D, New Capital Equipment, Major Marketing Programs that reduce profit initially but will significantly in later yrs. As both present and future profits are important, it is assumed that the goal is to maximize the present or discounted value

of all future profits. Formally stated the goal or objective


function of the firm is to Max. PV () = 1 /1+r + 2 /(1 + r)2 + .+ n / (1 +r)n
n

Max. PV = () t / (1 + r)t

t = 1.n
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t=1

= Profit in period t, r = appropriate discounted rate to reduce future profits for their present value.

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