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managerial economics e-528-529 sector-7 dwarka new delhi-110075 nr ramphal chowk and sector 9 metro station ph 011-47350606 m 7838010301-04 www.eduproz.in educate anytime anywhere greetings for the day about eduproz we at eduproz started our voyage with a dream of making higher education available for everyone since its inception eduproz has been working as a stepping-stone for the students coming from varied backgrounds the best part is ­ the classroom for distance learning or correspondence courses for both management mba and bba and information technology mca and bca streams are free of cost experienced faculty-members a state-of-the-art infrastructure and a congenial environment for learning are the few things that we offer to our students our panel of industrial experts coming from various industrial domains lead students not only to secure good marks in examination but also to get an edge over others in their professional lives our study materials are sufficient to keep students abreast of the present nuances of the industry in addition we give importance to regular tests and sessions to evaluate our students progress students can attend regular classes of distance learning mba bba mca and bca courses at eduproz without paying anything extra our centrally air-conditioned classrooms well-maintained library and well-equipped laboratory facilities provide a comfortable environment for learning honing specific skills is inevitable to get success in an interview keeping this in mind eduproz has a career counselling and career development cell where we help student to prepare for interviews our dedicated placement cell has been helping students to land in their dream jobs on completion of the course eduproz is strategically located in dwarka west delhi walking distance from dwarka sector 9 metro station and 4minutes drive from the national highway students can easily come to our centre from anywhere delhi and neighbouring gurgaon haryana and avail of a quality-oriented education facility at apparently no extra cost eduproz page 1

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managerial economics why choose edu proz for distance learning · · · · · · · · · edu proz provides class room facilities free of cost in eduproz class room teaching is conducted through experienced faculty class rooms are spacious fully air-conditioned ensuring comfortable ambience course free is not wearily expensive placement assistance and student counseling facilities edu proz unlike several other distance learning courses strives to help and motivate pupils to get high grades thus ensuring that they are well placed in life students are groomed and prepared to face interview boards mock tests unit tests and examinations are held to evaluate progress special care is taken in the personality development department have a good day eduproz page 2

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managerial economics karnataka state open university ksou was established on 1st june 1996 with the assent of h.e governor of karnataka as a full fledged university in the academic year 1996 vide government notification no/edi/uov/dated 12th february 1996 karnataka state open university act ­ 1992 the act was promulgated with the object to incorporate an open university at the state level for the introduction and promotion of open university and distance education systems in the education pattern of the state and the country for the co-ordination and determination of standard of such systems keeping in view the educational needs of our country in general and state in particular the policies and programmes have been geared to cater to the needy karnataka state open university is a ugc recognised university of distance education council dec new delhi regular member of the association of indian universities aiu delhi permanent member of association of commonwealth universities acu london uk asian association of open universities aaou beijing china and also has association with commonwealth of learning col karnataka state open university is situated at the north­western end of the manasagangotri campus mysore the campus which is about 5 kms from the city centre has a serene atmosphere ideally suited for academic pursuits the university houses at present the administrative office academic block lecture halls a well-equipped library guest house cottages a moderate canteen girls hostel and a few cottages providing limited accommodation to students coming to mysore for attending the contact programmes or termend examinations eduproz page 3

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managerial economics unit 1 meaning and importance of managerial economics introduction economics is a growing subject many new branches have been developed by various economists from time to time to meet the requirements of the time one such new addition is managerial economics it is interesting to study the reasons for the emergence of this new branch of economics in the last few decades all over the world business has expanded and diversified at a fast rate variety of goods and services unheard of so far have been developed wide-ranging changes have taken place both in the scope and the modes of business operation government interference in business has become very common in all nations side by side the business world has become increasingly complex challenging and competitive in recent years business uncertainties and fluctuations have become the order of the day the traditional micro economic theories have failed to offer solutions to the problems faced by business units today in order to help the business executives to solve their business and managerial problems a new branch of economics now popularly known as managerial economics has been developed by modern economists learning objective 1 learn the meaning and special features of managerial econamic meaning managerial economics is a science that deals with the application of various economic theories principles concepts and techniques to business management in order to solve business and management problems it deals with the practical application of economic theory and methodology to decision-making problems faced by private public and non-profit making organizations the same idea has been expressed by spencer and seigelman in the following words managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management according to mc nair and meriam managerial economics is the use of economic modes of thought to analyze business situation brighman and pappas define managerial economics as the application of economic theory and methodology to business administration practice joel dean is of the opinion that use of economic analysis in formulating business and management policies is known as managerial economics eduproz page 4

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managerial economics managerial economics is a highly specialized and new branch of economics developed in recent years it highlights on practical application of principles and concepts of economics in to business decision making process in order to find out optimal solutions to managerial problems it fills up the gap between abstract economic theory and managerial practice it lies mid-way between economic theory and business practice and serves as a connecting link between the two features of managerial economics 1 it is a new discipline and of recent origin 2 it is a highly specialized and separate branch by itself 3 it is basically a branch of microeconomics and as such it studies the problems of only one firm in detail 1 it is mainly a normative science and as such it is a goal oriented and prescriptive science 2 it is more realistic pragmatic and highlights on practical application of various economic theories to solve business and management problems 1 it is a science of decision-making it concentrates on decision-making process decisionmodels and decision variables and their relationships 1 it is both conceptual and metrical and it helps the decision-maker by providing measurement of various economic variables and their interrelationships 2 it uses various macro economic concepts like national income inflation deflation trade cycles etc to understand and adjust its policies to the environment in which the firm operates 3 it also gives importance to the study of non-economic variables having implications of economic performance of the firm for example impact of technology environmental forces sociopolitical and cultural factors etc 4 it uses the services of many other sister sciences like mathematics statistics engineering accounting operation research and psychology etc to find solutions to business and management problems it should be clearly remembered that managerial economics does not provide ready-made solutions to all kinds of problems faced by a firm it provides only the logic and methodology to find out answers and not the answers themselves it all depends on the manager s ability experience expertise and eduproz page 5

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managerial economics intelligence to use different tools of economic analysis to find out the correct answers to business problems learning objective ­ 2 scope of managerial economics the term scope indicates the area of study boundaries subject matter and width of a subject business economics is comparatively a new and upcoming subject consequently there is no unanimity among different economists with respect to the exact scope of business economics however the following topics are covered in this subject 1 objectives of a firm profit maximization has been considered as the main objective of a business unit in olden days but in the context of present day business environment many new objectives have come to the fore today there are multiple objectives and they are multi dimensional in nature some of them are competitive while others are supplementary in nature a few others are inter-connected and a few others are opposing in nature there are economic social organizational human and national goals there are managerial and behavioral theories all the objectives are determined by various factors and forces like corporate environment socio-economic conditions and nature of power in the organization and external constraints under which a firm operates in the midst of several objectives the traditional profit maximization objective even today has a very high place all other policies and programmes of a firm revolve round this objective however a firm aims at profit optimization rather than profit maximization today 2 demand analysis and forecasting a firm is basically a producing unit it produces different kinds of goods and services it has to meet the requirements of consumers in the market the basic problems of what to produce where to produce for whom to produce how to produce how much to produce and how to distribute them in the market are to be answered by a firm hence it has to study in detail the various determinants of demand nature composition and characteristics of demand elasticity of demand demand distinctions demand forecasting and so on the production plan prepared by a firm should take all these points into account 3 production and cost analysis eduproz page 6

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managerial economics production implies transformation of inputs into outputs it may be either in physical or monetary terms the physical production deals with how output is to be produced by a firm by employing different factor inputs in proper proportions maximization of output is one of the basic goals of a firm production analysis deals with production function laws of returns returns to scale economies of scale etc production cost is concerned with estimation of costs to produce a given quantity of output cost controls cost reduction cost cutting and cost minimization receive top most priority in production and cost analysis maximization of output with minimum cost is the basic slogan of any firm cost analysis deals with the study of various cost concepts their classification cost-output relationship in the short run and long run 4 pricing decisions policies and practices pricing decision is related to fixing the prices of goods and services.this depends on the pricing policy and practices adopted by a firm price setting is one of the most important policies of a firm the amount of revenue the level of income and above all the volume of profits earned by a firm directly depend on its pricing decisions hence we have to study price-output determination under different market conditions objectives and considerations of pricing policies pricing methods practices policies etc we also study price forecasting marketing channel distribution channel sales promotion policies etc 5 profit management a firm is basically a commercial or business unit consequently the success or failure of it is measured in terms of the amount of profit it is able to earn in a competitive market the management gives top most priority to this aspect under profit management one has to study various theories of profit emergence of profit functions of profit and its measurement profit policies techniques profit planning profit forecasting and break even point etc 6 capital management it is another crucial area of business.success of any business depends on adequate capital investment and its proper management basically one has to study the cost of employing capital and the rate of return expected from each and every project it is cost-benefit analysis under capital management one has to study capital requirement methods of capital mobilization capital budgeting optimal allocation of capital selection of highly profitable projects cost of capital return on capital planning and control of capital expenditure etc 7 linear programming and the theory of games eduproz page 7

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managerial economics the term linear means that the relationships handled are the same as those represented by straight lines and programming implies systematic planning or decision-making it implies maximization or minimization of a linear function of variables subject to a constraint of linear inequalities it offers actual numerical solution to the problems of making optimum choices it involves either maximization of profits or minimization of costs the theory of games basically attempts to explain what is the rational course of action for an individual firm or an entrepreneur who is confronted with the a situation where in the outcome depends not only on his own actions but also on the actions of others who are also confronted with the same problem of selecting a rational course of action in short under the conditions of conflicts and uncertainty a firm or an individual faces problem similar to that of the player of any game both these techniques are extensively used in business economics to solve various business and managerial problems 8 market structure and conditions the knowledge of market structure and conditions existing in various kinds of markets are of great importance in any business the number of sellers and buyers the nature extent and degree of competition etc determines the nature of policies to be adopted by a firm in the market 9 strategic planning it provides a framework on which long term decisions can be made which have an impact on the behavior of the firm the firm sets certain long-term goals and objectives and selects the strategy to achieve the same it is now a new addition to the scope of business economics with the emergence of mncs the perspective of strategic planning is global in fact the integration of business economics and strategic planning has given rise to a new area of study called corporate economics 10 other areas 1 macroeconomic management of the country relating to economic system national income trade cycles savings and investments and its impact on the working of a firm 1 budgetary operations of the government and its implications on the firm 2 knowledge and information about various government policies like monetary fiscal physical industrial labor foreign trade foreign capital and technology mncs etc and their impact on the working of a firm eduproz page 8

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managerial economics 1 impact of liberalization globalization privatization and marketization on the operations of firm 3 impact of international changes role of international financial and trade institutions in formulating domestic polices of a firm 1 problems of environmental degradation and pollution and its impact on the policies of a firm 2 improvements in the field of science and technology and its impact on a firm etc 3 socio-political cultural and other external forces and their influence of business operations thus it is clear that the scope of managerial economics is expanding with the growth of modern business and business environment importance of the study of managerial economics managerial economics does not give importance to the study of theoretical economic concepts its main concern is to apply theories to find solutions to day ­to-day practical problems faced by a firm 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 2 it helps the business executives to understand the various intricacies of business and managerial problems and to take right decision at the right time 3 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 globalization privatization liberalization and marketization 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 maximize 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 decisionmaking of a firm thus it has become a highly useful and practical discipline in recent years to analyze and find solutions to various kinds of problems in a systematic and rational manner learning objective ­ 3 eduproz page 9 4 5 6 7 8 9.

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managerial economics knowledge of decision making and forward planning managerial economist is a specialist and an expert in analyzing and finding answers to business and managerial problems he has in-depth knowledge of the subject he is an authority and has total command over his subject a managerial economist has to perform several functions in an organization among them decisionmaking and forward planning are described as the two major functions and all other functions are derived from these two basic functions a detailed description of the two functions is given below for a understanding 1 decision-making the word `decision suggests a deliberate choice made out of several possible alternative courses of action after carefully considering them the act of choice signifying solution to an economic problem is economic decision making it involves choices among a set of alternative courses of action decision-making is essentially a process of selecting the best out of many alternative opportunities or courses of action that are open to a management decision-making is a management function decision-making is a routine affair in any business unit hence it is a part of business activity it is a basic function of a managerial economist in the day-to-day business he has to take innumerable decisions sometimes the manager takes the decision himself sometimes in collaboration and consultations with others some decisions are taken on the spot and some others are taken after careful thinking some decisions are major and complex while others are minor and simple some decisions are taken in the absence of any information some decisions are taken in the background of certainty known factors and information some other decisions are taken in the midst of uncertainties the choice made by the business executives are difficult crucial and have far-reaching consequences the basic aim of taking a decision is to select the best course of action which maximizes the economic benefits and minimizes the use of scarce resources of a firm hence each decision involves cost-benefit analysis any slight error or delay in decision making may cause considerable economic and financial damage to a firm it is for this reason management experts are of the opinion that right decision ­ making at the right time is the secret of a successful manager 2 forward 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 basically planning is concerned with tackling future situations in a systematic manner eduproz page 10

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managerial economics forward 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 it is prepared in the background of uncertain and unpredictable environment and guess work future events and happenings cannot be predicted accurately the success or failure of the future plan depends on a number of factors and forces which are unknown in nature much of economic activity is forward looking every time we build a new factory add to the stocks of inputs trucks computers or improvements in r&d our intension is to enhance the future productivity of the firm growing firms devote a significant share of their current output to net capital formation to bolster future economic output a business executive must be sufficiently intelligent enough to think in advance prepare a sound plan and take all possible precautionary measures to meet all types of challenges of the future business hence forward planning has acquired greater significance in business circles summary managerial economics is a new and a highly specialized 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 it is applied economics and makes an attempt to explain how various economic concepts are usefully employed in business management it is a practical subject it opens up the mind of a managerial economist to the complex and highly challenging business world the features of managerial economics throw light on the nature of the emerging subject and the scope gives information about the wide coverage of the subject the concepts of decision making and forward planning are the two basic functions of a managerial economist in a way the entire subject matter of managerial economics is to be understood in the background of these two functions self assessment questions 1 1 managerial economics is the integration of with for solving business and management problems 2 managerial economics fills up the gap between and 3 managerial economics is mainly a science 4 basic objective a firm to day is 5 managerial economic is basically a branch of economics 6 two major function of a managerial economic are and eduproz page 11

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managerial economics terminal questions 1 2 3 4 define managerial economic and explain its main characteristics discuss the scope of managerial economics explain the importance of managerial economics discuss the functions of a managerial economist answer to saqs and tqs answer for self assessment questions 1 1 2 3 4 5 6 economic theory business practice economic theory practice prescriptive profit optimization micro decision making forward planning answer to terminal questions 1 2 3 4 refer to unit 1.2 refer to unit 1.3 refer to unit 1.4 refer to unit 1.5 unit 2 demand analysis introduction demand and supply are the two main concepts in economics experts are of the opinion that entire subject of economics can be summarized in terms of these two basic concepts hence the knowledge about demand and supply are of great importance to a student of economics eduproz page 12

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managerial economics learning objective 1 understand the concept of demand and its features the term demand is different from desire want will or wish in the language of economics demand has different meaning any want or desire will not constitute demand demand desire to buy ability to pay willingness to pay the term demand refers to total or given quantity of a commodity or a service that are purchased by the consumer in the market at a particular price and at a particular time the following are some of the important qualifications of demand· · · · · it is backed up by adequate purchasing power it is always at a price it should always be expressed in terms of specific quantity it is created in the market it is related to a person place and time consumers create demand demand basically depends on utility of a product there is a direct relation between the two i.e higher the utility higher would be demand and lower the utility lower would be the demand learning objective -2 knowledge of demand schedule law of demand exceptions to the law of demand and shifts in demand the demand schedule explains the functional relation ship between price and quantity variations it is a list of various amounts of a commodity that a consumer is willing to buy and so seller to sell at different prices at one instant of time it is necessary to note that the demand schedule is prepared with reference to the price of the given commodity alone we ignore the influence of all other determinants of demand on the purchase made by a consumer the following individual demand schedule shows that people buy more when price is low and buy less when price is high eduproz page 13

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managerial economics market demand schedule when the demand schedules of all buyers are taken together we get the aggregate or market demand schedule in other words the total quantity of a commodity demanded at different prices in a market by the whole body consumers at a particular period of time is called market demand schedule it refers to the aggregate behavior of the entire market rather than mere totaling of individual demand schedules market demand schedule is more continuous and smooth when compared to an individual demand schedule the study of the market demand schedule is of great importance to a business manager on account of the following reasons 1 it helps to make an intelligent forecast of the quantity to be sold at different prices 2 it helps the business executives to know the various quantities that are likely to be demanded at different prices 3 it helps to study the effect of taxes on the total demand for goods in the market 4 it helps to forecast the percentage of profits due to variation in prices and to arrange production well in advance eduproz page 14

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managerial economics 5 it helps the monopolist to manipulate prices to stimulate demand for a product 6 it helps the managers to estimate its production plan in accordance with the market demand demand curve a demand curve is a locus of points showing various alternative price ­ quantity combinations in short the graphical presentation of the demand schedule is called as a demand curve it represents the functional relationship between quantity demanded and prices of a given commodity the demand curve has a negative slope or it slope downwards to the right the negative slope of the demand curve clearly indicates that quantity demanded goes on increasing as price falls and vice versa the law of demand it explains the relationship between price and quantity demanded of a commodity it says that demand varies inversely with the price the law can be explained in the following manner other things being equal a fall in price leads to expansion in demand and a rise in price leads to contraction in demand the law can be expressed in mathematical terms as demand is a decreasing function of price symbolically thus d f p where d represent demand p stands for price and f denotes the functional relationships the law explains the cause and effect relationship between the independent variable [price and the dependent variable [demand there is no rule that a consumer has to buy more whenever price of the commodity falls and vice-versa the law explains only the general tendency of consumers while buying a product thus the law does not have universal validity a consumer would buy more when price falls due to the following reasons eduproz page 15

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