NATIONAL OPEN UNIVERSITY OF NIGERIA COURSE CODE : BHM 303 COURSE TITLE: MANAGERIAL ECONOMICS 1 MANAGERIAL ECONOMICS (THE COURSE GUIDE) THE NEED Managerial Economics as a course required for effective resource management was put in place due to the following developments in the global business environment: (a) Growing complexity of business decision-making processes. (b) Increasing need for the use of economic logic, concept, theories, and tools of economic analysis in the process of decision-making. (c) Rapid increases in the demand for professionally trained managerial manpower. These developments have made it necessary that every manager aspiring for good leadership and achievement of organizational objectives be equipped with relevant economic principles and applications.
Unfortunately, a gap has been observed in this respect among today’s managers. It is therefore the aim of this course to bridge such gap. THE COURSE OBJECTIVES On completion of the requirements of this course, students and managers alike will be expected to: 1. Understand the relative importance of Managerial Economics; 2.
Know how the application of the principles of managerial economics can aid in the achievement of business objectives; 3. Understand the modern managerial decision rules and optimization techniques; 4. Be equipped with tools necessary in the analysis of consumer behaviours, as well as in forecasting product demand; 5. Be equipped with the tools for analyzing production and costs; 6.
Understand and be able to apply latest pricing strategies; THE COURSE STRUCTURE This course will be presented in modules, each of which is designed to achieve specific managerial objectives. In a nutshell the course contents are as follows: 2 MODULE 1: Basic Principles in the Application of Managerial Economics 1.2 Objectives of a Business Firm 1. Meaning and Theories of Profit 2. Profit maximization as a Business Objective 3.
Sales, Growth Rate, and Maximisation of Utility function as business objectives 4. Long-Run Survival, Market Shares, and Entry Prevention 1.3 Constrained Optimisation (a) The Substitution Method (b) Lagrangian Multiplier Method MODULE 2: Decision Analysis 2. Certainty and Uncertainty in Decision Analysis 2. Analysis of the Decision Problem 3.
Expected Monetary Value Decision 4. Decision-Making Involving Sample Information 5. Time Perspective in Business Decisions MODULE 3: Analysis of Market Demand, Demand Functions, Demand Analysis and Demand Forecasting 3.2 Analysis of Market Demand 1. Definition of Market Demand 2.
Types of Demand 3. Determinants of Market Demand 3 3. Linear Demand Function 2. Non-Linear Demand Function 3.
Multi-Variate or Dynamic Demand Function 3.4 Elasticity of Demand (a) Own-Price Elasticity (b) Cross-Elasticity (c) Income-Elasticity (d) Advertisement-Elasticity (e) Elasticity of Price Expectation 3. The Forecasting Techniques MODULE 4: Production and Cost Analysis 4.2 The Theory of Production 2. The Production Function 3. Optimal Input Combinations 4.
Input Price Changes and the Optimal Combinations 4.3 Theory of Cost and Break-Even Analysis 1. The Business Cost Concepts 2. The Theory of Cost: Cost-Output Relations 3. Economies and Diseconomies of Scale 4.
Break-Even Analysis: Linear Cost and Revenue Functions 5. Break-Even Analysis: Non-Linear Cost and Revenue Functions \ MODULE 5: Market Structure and Pricing Decisions 5.2 Price Determination Under Perfect Competition (a) Pricing in Market Period (b) Pricing in the Short-Run (c) Pricing in the Long-Run 4 5.3 Price Determination Under Pure Monopoly 1. Monopoly Pricing and Output Decision in the Short-Run 2. Monopoly Pricing and Output Decision in the Long-Run REQUIRED TEXT Dwivedi, D.
(2002) Managerial Economics, Sixth Edition (New Delhi: Vikas Publishing House Ltd) Dr Onyemaechi Onwe 5 MANAGERIAL ECONOMICS UNIT 1: DEFINITION AND IMPORTANCE OF MANAGERIAL ECONOMICS Content 1.0 Definition and Importance of Managerial Economics 3.1 Definition of Managerial Economics 3.2 Importance of Managerial Economics 3.3 Scope of Managerial Economics 3.4 Managerial Economics and Gap between Theory and Practice 3.5 Self-Assessment Exercise 4.0 Tutor-Marked Assignment 7.0 Introduction The discovery of managerial economics as a separate course in management studies has been attributed to three major factors: 3. The growing complexity of business decision-making processes, because of changing market conditions and the globalization of business transactions. The increasing use of economic logic, concepts, theories, and tools of economic analysis in business decision-making processes. Rapid increase in demand for professionally trained managerial manpower.
It should be noted that the recent complexities associated with business decisions has increased the need for application of economic concepts, theories and tools of economic analysis in business decisions. The reason has been that making appropriate business decision requires clear understanding of existing market conditions market fundamentals and the business environment in general. Business decision-making processes therefore, requires intensive and extensive analysis of the market conditions in the product, input and financial markets. Economic theories, logic and tools of analysis have been developed for the analysis and prediction of market behaviours.
The application of economic concepts, theories, logic, and analytical tools in the assessment and prediction of market conditions and business environment has proved to be a significant help to business decision makers all over the globe.0 Objectives At the end of this unit, you will be expected to: 1. Have an understanding of the meaning and importance of managerial economics 2. Understand the relevant phases in business decision making processes 6 3. Be familiar with the scope of Managerial Economics 4.
Be able to discuss freely how managerial economics can fill the gap between theory and practice 3.0 Definition and Importance of Managerial Economics 3.1 Definition of Managerial Economics Managerial economics has been generally defined as the study of economic theories, logic and tools of economic analysis, used in the process of business decision making. It involves the understanding and use of economic theories and techniques of economic analysis in analyzing and solving business problems. Economic principles contribute significantly towards the performance of managerial duties as well as responsibilities. Managers with some working knowledge of economics can perform their functions more effectively and efficiently than those without such knowledge.
Taking appropriate business decisions requires a good understanding of the technical and environmental conditions under which business decisions are taken. Application of economic theories and logic to explain and analyse these technical conditions and business environment can contribute significantly to the rational decision-making process.2 Importance of Managerial Economics In a nutshell, three major contributions of economic theory to business economics have been enumerated: 1. Building of analytical models that help to recognize the structure of managerial problems, eliminate the minor details that can obstruct decision making, and help to concentrate on the main problem area. Making available a set of analytical methods for business analyses thereby, enhancing the analytical capabilities of the business analyst.
Clarification of the various concepts used in business analysis, enabling the managers avoid conceptual pitfalls.1 Economic Analysis and Business Decisions Business decision-making basically involves the selection of best out of alternative opportunities open to the business organization. Decision making processes involve four main phases, including: Phase One: Determining and defining the objective to be achieved. Phase Two: Collection and analysis of information on economic, social, 7 political, and technological environment. Phase Three: Inventing, developing and analyzing possible course of action Phase Four: Selecting a particular course of action from available alternatives.
Note that phases two and three are the most crucial in business decision-making. They put the manager’s analytical ability to test and help in determining the appropriateness and validity of decisions in the modern business environment. Personal intelligence, experience, intuition and business acumen of the manager need to be supplemented with quantitative analysis of business data on market conditions and business environment. It is in fact, in this area of decision-making that economic theories and tools of economic analysis make the greatest contribution in business.
If for instance, a business firm plans to launch a new product for which close substitutes are available in the market, one method of deciding whether or not this product should be launched is to obtain the services of a business consultant. The other method would be for the decision-maker or manager to decide. In doing this, the manager would need to investigate and analyse the following thoroughly: (a) production related issues; and, (b) sales prospects and problems. With regards to production, the manager will be required to collect and analyse information or data on: (c) available production techniques; (d) cost of production associated with each production technique; (e) supply position of inputs required for the production process; (f) input prices; (g) production costs of the competitive products; and, (h) availability of foreign exchange, if inputs are to be imported.
Regarding the sales prospects and problems, the manager will be required to collect and analyse data on: (a) general market trends; (b) the industrial business trends; (c) major existing and potential competitors, as well as their respective market shares; (d) prices of the competing products; (e) pricing strategies of the prospective competitors; (f) market structure and the degree of competition; and, (g) the supply position of complementary goods. The application of economic theories in solving business problems helps in facilitating decision-making in the following ways: 8 First, it can give clear understanding of the various necessary economic concepts, including demand, supply, cost, price, and the like that are used in business analysis. Second, it can help in ascertaining the relevant variables and specifying the relevant data. For example, in deciding what variables need to be considered in estimating the demand for two different sources of energy, petrol and electricity.
Third, it provides consistency to business analysis and helps in arriving at right conclusions.3 Scope of Managerial Economics Managerial economics comprises both micro- and macro-economic theories. Generally, the scope of managerial economics extends to those economic concepts, theories, and tools of analysis used in analysing the business environment, and to find solutions to practical business problems. In broad terms, managerial economics is applied economics. The areas of business issues to which economic theories can be directly applied is divided into two broad categories: 1.
Operational or internal issues; and, 2. Environment or external issues. Operational problems are of internal nature. These problems include all those problems which arise within the business organization and fall within the control of management.
Some of the basic internal issues include: (f) choice of business and the nature of product (what to produce); (g) choice of size of the firm (how much to produce); (h) choice of technology (choosing the factor combination); (i) choice of price (product pricing); (j) how to promote sales; (k) how to face price competition; (l) how to decide on new investments; (m) how to manage profit and capital; and, (n) how to manage inventory. The microeconomic theories dealing with most of these internal issues include, among others: 4. The theory of demand, which explains the consumer behaviour in terms of decisions on whether or not to buy a commodity and the quantity to be purchased. Theory of Production and production decisions.
The theory of production or theory of the firm explains the relationship between inputs and output. Analysis of Market structure and Pricing theory. Price theory explains how prices are determined under different market conditions. Profit analysis and profit management.
Profit making is the most common business objective. However, making a satisfactory profit is not always 9 guaranteed due to business uncertainties. Profit theory guides firms in the measurement and management of profits, in making allowances for the risk premium, in calculating the pure return on capital and pure profit, and for future profit planning. Theory of capital and investment decisions.
Capital is the foundation of any business. It efficient allocation and management is one of the most important tasks of the managers, as well as the determinant of the firm’s success level. Some of the important issues related to capital include: choice of investment project; assessing the efficiency of capital; and, the most efficient allocation of capital. Environmental issues are issues related to the general business environment.
These are issues related to the overall economic, social, and political atmosphere of the country in which the business is situated. The factors constituting economic environment of a country include: 1. The existing economic system 2. General trends in production, income, employment, prices, savings and investment, and so on.
Structure of the financial institutions.
