DECISION MAKING IN MANAGERIAL ECONOMICS

2. Outline
What is managerial economics and why should
you study it?
Examples of managerial decisions
Six steps to decision making
How does managerial economics helps in
decision making?
?

3. Managerial economics
is the application of
economic theory to
management decision
making
What is managerial economics?
Economics Management
Managerial
economics

4. Why Managerial Economics ?
Managerial economics is the study of how managers can apply
economic principles and analyses as well as quantitative tools in
making an effective business and managerial decisions
involving the best use (allocation) of the organizations scarce
resources to achieve their objectives.

5. Examples of Managerial Decisions
• How to use economic theory to set prices that
maximize profits.
• How to use economic theory to choose the cost-
minimizing production technique for a given scale of
output.
• How to use economic theory to select the “optimal”
location for a new restaurant, grocery store, etc.
• How to use economic theory to forecast near-term
demand for goods and services.

6. ROLE OF MANAGERIAL ECONOMICS IN
MANAGERIAL DECISION MAKING
Managerial economics uses economic concepts and decision
science techniques to solve managerial problems.
Management Decision Problems
Managerial Economics
Optimal Solutions to Managerial
Decision Problems
Economic Concepts Decision Sciences

7. • Framework for Decisions
• Theory of Consumer Behaviour
• Theory of the Firm
• Theory of Market Structure and Pricing
Economic Concepts
Management Decision Problems
Product Price and Output
• Make or Buy
• Production Technique
• Internet Strategy
• Advertising Media and Intensity
• Investment and Financing

8. Decision Sciences
Tools and Techniques of Analysis
• Numerical Analysis
• Statistical Analysis
• Forecasting
• Game Theory
• Optimization
Managerial Economics
Use of Economic Concepts and Decision Science Methodology to
Solve Managerial Decision Problems

9. Six Steps to Decision Making
1. Defining the Problem
2. Determining the
Objective
3. Exploring the
Alternatives
4. Predicting the
consequences
5. Making a choice
6. Performing
sensitivity analysis

10. Defining the problem
“I have a flat tire.”

11. Defining the objective
The spare won’t last long I
gotta get this tire replaced!

12. Exploring the alternatives
• Go to Sears
• Go to Wal-Mart

13. Predicting the consequences
• Wal-Mart is closer and cheaper.
• Sears is a costlier and poor in facilities.

14. Making a choice
I’m going to Wal-Mart

15. Sensitivity Analysis:
Why is it Useful?
Sensitivity analysis provides an insight into the key
features of a problem that affect a decision—
•e.g., the decision to continue a product line depends of
profit forecasts, which in turn are based on assumptions
about future sales, prices, or costs. What happens to our
forecast when we modify the assumptions?
•It allows us to trace the effects of changes about which
the manager may be uncertain.
•It can give solutions to decisions which are recurring, but
must be made under slightly different conditions.

16. How does managerial economics
helps in decision making?
Following are the steps helps to managers while taking
decisions..
1.Establish objectives.
2.Define the problem.
3.Identify factors that affect the problem.
4.Specify alternative solutions.
5.collect data and other information's.
6.Evaluate and screen alternatives.
7.Implement best alternative and monitor result.

18. 1. “Kolaveri D”
• Tamil Actor Dhanush recorded a
song for the film 3, in which he also
plays the lead role - only to discover
soon after that a disgruntled
employee in his office had leaked it
on YouTube.
• "Then someone suggested making
a video of the song and releasing
that as well on YouTube as the
official version,“.
• As if by magic, the song became a
rage, effortlessly transcending
language barriers - the first Tamil
song, albeit with a smattering of
English, to do so.

19. 2. VOLVO
CHANGE STRATEGY
Volvo brought in its inter-city bus when it
saw the market was not ready for a city bus
SELL THE CONCEPT, NOT JUST THE
PRODUCT
Volvo engaged with all stakeholders - from
operators to passengers to drivers - to sell its
buses
USE MACRO CHANGES TO YOUR
ADVANTAGE
When Volvo saw that increasing congestion
and growing environmental awareness were
making public transport attractive, it brought
back the city bus
CHANGE THE GAME
When the competition started to close in on
Volvo, it introduced products that would
increase the number of passengers

20. 3. GODREJ APPLIANCES
THE PROBLEM
Despite the strong brand name,
people were turning away from the
company's products.
THE CHALLENGE
The market had turned competitive
and Godrej could not connect with
young buyers.
THE WAY OUT
Introduce better technology, more
products, re-brand products to
appeal to the youth.
THE SUCCESS
Success Acquired a youthful tech
image, recaptured significant market
share in refrigerators.