Financial Concepts for Loans and Real Estates

We can say that production is an activity which transforms the input into output. For example, there is need of labour and machinery to manufacture car. It is the technical aspect between input and output. The function of production express the relationship between quantity of output produced and quantity of input required. Production function can be expressed as:

Q = f (L,K)
L = Labour
K = Capital
Q = Output

Production function has four ways:

Law of variable proportion:

We can understand it as:

Total Product (TP), which is produced by a firm; Average Product (AP), it is the divided quantity of variable factors which is used to produce.

AP = TP/Q

AP = Average Product
TP = Total Product
Q = Number of Variable Factors

Marginal Product (MP) – Law of variable proportion is also known as law of diminishing returns. When variable factors are increased in equal doses, keeping the fixed factor constant, the total product will increase.

Law of Variable Proportion is an old economic principle, which was the firs redefined version of Marshall. Most of the examples of production function involve manufacturing sectors and agriculture.

Law of Return to scale:

It is known as long run production function also. The Law of Returns to Scale will show the change in the output when all the factors of production are increased together. It describes the relationship between output and scale of input.

Law of Economies of Scale:

It exists when larger output is associated with low per unit cost. It has been divided into two economies – Internal Economies and External Economies.

At last, economies of scale exist when large output is associated with low per unit cost. Economies of scale have two parts, internal and external economies of scale. Dis-economies of scale arise to a firm beyond optimum level, as the firm may face problem like lack of co-ordination, management, marketing etc. Economies of scope are decline in the average cost due to change in the product mix of output. A production process becomes chapter when there are more than one products produced instead of one as there is more efficiency in distribution of making.

“Managerial Economics” term is very old. The word has taken place in last fifty years or so. Economics is the study of human behaviour in production, distribution and consumption of material goods. Management is the disciplinary work of organizing and allocating a firm’s resources and objectives. So, these two definitions give the appropriate understanding of managerial economics.

Managerial economics is interchangeable with Business Economics. In spite of, there are some differences between these two terms.

Business Economics is known to understand for running any business.

Managerial Economics emphasizes on the function of managerial function of a business firm.

We can take some definition of Managerial Economics to clear its essence. Dean writes in his book Managerial Economics Text book, “Managerial Economics is the use of economic analysis in the formulation of business policies.” So, he emphasizes it as business policies.

On the other hand, Spencer and Seigelman, define it, “the integration of economic theory with business practice to facilitate decision making and forward planning.” So, the definition reveals it as business practices, decision making and forward planning.

Scope of Managerial Economics:

We will conclude it as a manager decision. So, for a manager there is different areas in which decision are required to be taken. These can be classified as:

Decision relating to demand – We already know, every manager is concerned with the demand for his product. So, a manager takes decision regarding the quality and quantity of his product. There are many economic tools which are applied during the decision making – Demand, Elasticity of Demand and Demand Forecasting.

Decision related to cost and production – Every manager has to analyze the cost and various laws governing production that is also a part of managerial economics.

Decision relating to price and market – We can’t escape with market analysis. So, Market analysis is the part of managerial economics. A manager should have various market structures and various pricing policies.

Decision relating to profit management – Maximum profit is the essence of every firm. So, these can be related to profit management.

Macro economic factor – A firm depends on socio-economic environment. So, to understand macro level factors there are needed of macro factors.

Significance of Economic Analysis:

All the economic has been divided into two categories – Macro and Micro. Micro economics are related to consumer products, individual products, whereas Macro is attached with aggregate demand, national income.

The same situation comes in a business man life. There is also needed of priority of business and products. A business man decides market segmentation, product segmentation and takes proper decision.

Definite and indefinite results are the outcome of market. These are inevitable in market society. This can be called as uncertainty.