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Inputs and Outputs: Every economy must make choices about the economy’s inputsand outputs.Inputs: Commodities used to produce goods and services .A economy uses its existingtechnology to combine inputs to produce outputs.Output: The various useful goods and services that result from production process that isdirectly consumed or employs in further production.Another term for inputs is factors of production:Factors of Production: It refers to the resources used to produce goods and services in asociety. Economists divide these resources into the four categories described below. Land refers to all natural resources. Such things as the physical land itself, water,soil, timber are all examples of land. The economic return on land is called rent.For example, a person could own land and rent it to a farmer who could use it togrow crops. A second resource is labor. Labor refers to the human effort to produce goods and services. The economicreturn on labor is called wages. Anyone who has worked for a business andcollected a paycheck for the work done understands wages. A third factor ofproduction is capital. Capital is anything that is produced in order to increase productivity in the future.Tools, machines and factories can be used to produce other goods. The field ofeconomics differs from the field of finance and does not consider money to becapital. The economic return on capital is called interest. Finally, the fourth factor of production is called entrepreneurship.Entrepreneurship refers to the management skills, or the personal initiative usedto combine resources in productive ways. Entrepreneurship involves the taking ofrisks. The economic return on entrepreneurship is profitsMeaning of Managerial Economics: It is another branch in the science of economics.Sometimes it is interchangeably used with business economics. Managerial economics isconcerned with decision making at the level of firm. It has been described as aneconomics applied to decision making. It is viewed as a special branch of economicsbridging the gap between pure economic theory and managerial practices. It is defined asapplication of economic theory and methodology to decision making process by themanagement of the business firms. In it, economic theories and concepts are used to solvepractical business problem. It lies on the borderline of economic and management. Ithelps in decision making under uncertainty and improves effectiveness of theorganization. The basic purpose of managerial economic is to show how economicanalysis can be used in formulating business plans.Definitions of Managerial Economics: In the words of Mc Nair and Merriam,” MEconsist of use of economic modes of thought to analyze business situation”. According toSpencer and Seigelman it is defined as the integration of economic theory with businesspractice for the purpose of facilitating decision making and forward planning by themanagement”. Economic provides optimum utilization of scarce resource to achieve the9

desired result. ME’s purpose is to show how economic analysis can be used formulatingbusiness planning.Managerial Economics Management EconomicsManagement deals with principles which helps in decision making under uncertainty andimproves effectiveness of the organization. On the other hand economics provide a set ofpreposition for optimum allocation of scarce resources to achieve a desired result.Managerial Economics deals with the integration of economic theory with businesspractices for the purpose of facilitating decision making and forward planning bymanagement. In other words it is concerned with using of logic of economics,mathematics, and statistics to provide effective ways of thinking about business ----------------1.2 CONCEPT OF ECONOMICS IN DECISION -------------Students, earlier we had discussed various aspects of economics- scarcity and efficiencyand meaning and role of managerial economics. Now we will be discussing the variousaspects of decision making.What do you mean by Decision Making?Well decision making is not something which is related to managers only or which isrelated to corporate world, but it is something which is related to everybody’s life.Whether a person is working or non working, irrespective of his/her field, decisionmaking is important to everyone. You need to make decision irrespective of the work youare doing. As a student also you have to take so many decisions. Suppose at a particularpoint of time you want to go for a movie, and at the same point of you want to go forshopping then what you will do. You can’t do two things at the same point of time. Youhave to decide what to do first and what to do next. Therefore decision making can becalled as choosing the right option from the given one. To decide is to choose. Whether todo this or to do that is what is decision making.Decision making is the most important function of business managers. Decision makingis the central objective of Managerial Economics. Decision making may be defined as theprocess of selecting the suitable action from among several alternative courses of action.The problem of decision making arises whenever a number of alternatives are available.Such as: What should be the price of the product? What should be the size of the plant to be installed? How many workers should be employed? What kind of training should be imparted to them? What is the optimal level of inventories of finished products, raw material, spareparts, etc.?Therefore we can say that the problem of decision making arises due to the scarcity ofresources. We have unlimited wants and the means to satisfy those wants are limited,with the satisfaction of one want, another arises, and here arises the problem of decision10

making. While performing his function manager has to take a lot of decisions inconformity with the goal of the firm. Most of the decisions are taken under the conditionof uncertainty, and involves risks. The main reasons behind uncertainty and risks areuncertain behavior of the market forces which are as follows: The demand and supply Changing business environment Government policies External influence on the domestic market Social and political changes The maximum use of limited resources.Now we will discuss various aspects relating to the management decision making orManagerial Decision Making. What Is Management?9 Management is the process of coordinating people and other resources toachieve the goals of the organization9 .Most organizations use various kinds of resources. Basic Management FunctionsA number of management functions must be performed if any organization is tosucceed.9 Establishing Goals and Objectives.9 Establishing Plans to Accomplish Goals and Objectives.9 Organizing the Enterprise. Leading and Motivating9 Controlling Ongoing Activities. Kinds of ManagersThey can be classified along two dimensions:9 Level within the organization which include: Top managers; MiddleManagers; First Line Managers.9 Area of management which include: Financial Managers; OperationsManagers; Marketing Managers; Human Resources Managers;Administrative Managers. What Makes Effective Managers?Key Management Skills. The skills that typify effective managers tend to fall intothree categories.9 Technical Skills9 Conceptual Skills.9 Interpersonal Skills.9 Managerial Roles.9 Decisional Roles9 Interpersonal Roles9 Informational Roles.11

Managerial Decision MakingDecision-making is the act of choosing one alternative from among a set ofalternatives. Managerial decision making involves four steps.9 Identifying the Problem or Opportunity9 Generating Alternatives.9 Selecting an Alternative9 Implementing and Evaluating the SolutionNow we will discuss the various factors affecting decision making. Conditions Affecting Decision Making: An Ideal Business situation would bethe one where9 Full Information with managers to make decisions with certainty9 An Actual business situation with managers:9 Most business are characterized by incomplete or ambiguous information Conditions that affect decision making: (certainty, risk and uncertainty)9 Certainty: Situation when decision makers are fully informed about Aproblem; Alternative solutions; their respective outcomes; Individuals cananticipate, and even exercise some control over events and their outcomes.9 Risk: Condition when decision makers rely on incomplete, yet reliableinformation. Manager does not know the certainty the future outcomesassociated with alternative courses of action, although he knows theprobability associated with each alternative9 Uncertainty: It is the condition that exists when little or no factualinformation is available about a problem, its alternative and their respectiveoutcomes. He does not have enough information to determine the probabilitiesassociated with each alternative possible that he may be unable even to definethe problemHope you all must be clear with the concepts certainty, risk and uncertainty. Now, wewill discuss various models of decision making. Decision Making Models The Classical Model:9 Also called rational model9 A prescriptive approach that outlines how managers should make decisions.9 Assumptions: Manager has complete information about decision situation andoperations under condition of certainty; Problem is clearly defined, and thedecision – maker has knowledge of all possible alternatives and theiroutcomes; Through the use of quantitative techniques , rationality and logic ,12

the decision maker evaluates the alternatives and selects the optimumalternative .The Administrative Model9 Descriptive approach that outlines how managers actually do makedecisions9 Also called organizational, neoclassical or behavioral model9 Simon recognized that people do not always make decisions with logicand rat

1. Managerial Economics – Analysis, Problems and Cases, P.L. Mehta, Sultan Chand Sons, New Delhi 2. Managerial Economics – Varshney and Maheshwari, Sultan Chand and Sons, New Delhi 3. Managerial Economics – D. Salvatore, McGraw Hill, New Delhi 4. Managerial Economics – Pearson and Lewis, Prentice Hall, New Delhi 5.