Managerial Economics SCDL SEM1

Nature of Managerial Economics:

1. Help in decision making by firms.
   
2. Assists firms in forecasting
   
3. Emphasis is laid on proposition which are likely to be useful to the management
   
4. Prescriptive in nature and character. A normative science which reflects upon desirability or propositions
   
5. Applied science
   

Scope of Managerial Economics

1. Demand Analysis and Forecasting
   
2. Production Function
   
3. Cost Analysis
   
4. Inventory Management
   
5. Advertising
   
6. Price System
   
7. Resource allocation
   
8. Capital budgeting
   

   ME covers 2 important areas Decision making and forward planning.
   

Significance of Managerial Economics:

Prof Baumol.

1. Build Analytical Model
   
2. A set of Analytical Methods
   
3. Clarity of various concepts used in business analysis, to avoid conceptual pitfalls.
   

Economic problems:

3 main resources: LAND, LABOUR AND CAPITAL – FACTORS OF PRODUCTION

Commodities- produced by factors of production. Its divided into 2 parts – goods (tangible) and services (intabgible)

The total output of all commodities in one country for a period (year) is called Gross National Product.

Economic problem : At family level and universal level.

PROFIT

Accounting Profit: Surplus of revenue over and above all paid out cost including both manufacturing and overhead expences.

Accounting profit = Total revenue –( wages+rent+Interest+cost of material)

Only explicit or cost recorded in the books of accounts are considered

Implicit cost is the opportunity cost. It is the payment that would be necessary to draw forth factors of production from their most remunerative alternative employment.

Pure profit makes provision for insurable risk, depreciation and necessary minimum payment to shareholders to prevent them from withdrawing their capital.

Pure profit = total revenue – (explicit cost + implicit cost)

Types of profit :

Gross profit : total receipt – total expenditure

An entrepreneur is required to make the following payments from gross profit

1. Payment for the factors of the production contributed by himself. Like Rent for the use of land, or national reward for the use of his own land.
   
2. Depreciation and maintenance charges
   
3. Extra personal profits:
   
4. Monopoly profit , change profit
   

Now the residual portion is called the net profit. The reward the entrepreneur gets for 1. Undertaking risk and uncertainty 2. For organizing production 3. For innovating is called pure profit.

Theories of Profit

1. Risk taking theory
   

   Hawley à Profit is the reward of risk taking.
   

2. Uncertainity bearing theory
   

   F.H Night à Insurable risk (fire theft accident), risk that cannot be insured.
   

3. Innovation theory
   

   Joseph schumpter à profit is the reward of innovation
   

4. Dynamic theory of profit
   
   1. Changes in quality and quantity of human needs
      
   2. Changes in techniques of production
      
   3. Changes in supply of capital
      
   4. Changes in organization in business
      
   5. Changes in population
      

Measurement of Profit:
Asset – Liabilitities = Proprietorship or net worth.

Accounting method takes into consideration the original cost of the machine, but economic concept the relplaccement cost of the machine would be used.

Factors leading to economic and traditional concept of valuation:

Depriciation , Inventory valuations and unaccounted value changes in the assets and the liabilities.

Profit policy:

The profit that an ent. Expect is subjected to the following

internal criteria:

1. The rate of profit should be such that to attract share capital.
   
2. Rate ofprofit should be comparable to similar companies
   
3. Should be comparable to profit rates of the past
   
4. Should be large enough to allow for a plough back.
   

External factors:

1. Full employment
   
2. Potential rivals
   
3. Consumer's confidence
   
4. Political climate.
   

The last 2 points hold well in India where consumer is the king.

Reasonable profit target:

Forms of profit standard: Money, % of sales, % of ROI.

Setting profit standard:

1. Must be high enough to attract capital
   
2. Plough back method
   

Normal earning standard: discouraging growth of competition, keeping stake holders satisfied.