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CHAPTER-1

MANAGERIAL ECONOMICS: MEANING, NATURE, SCOPE, AND IMPORTANCE
AUTHOR: DR. JASWINDER SINGH

a neo-classical economist. He is regarded as the father of economics. namely human behavior. Alfred Marshall.  Growth Viewpoint: Indicates the modern perspective of economics.MEANING OF ECONOMICS  Economics is defined by taking four viewpoints. allocation of resources. and alternative uses of resources. Lionel Robbins defined economics as a science of scarcity or choice. which are explained as follows:  Wealth Viewpoint: Represents the classical perspective of economics.  Welfare Viewpoint: Represents a neo-classical standpoint of economics. Dreamtech Press :: Chapter 1 2 . © 2012. According to Adam Smith. associated the term economics with man and his welfare. economics is a science of wealth.  Scarcity Viewpoint: Refers to the pre-Keynesian thought of economics. Paul Samuelson outlined three main aspects.

it can be said that economics is a social science. Some economists believed that in economics. The basic function of economics is to study how individuals. households.NATURE OF ECONOMICS  Economics as a Science: Refers to the scientific nature of economics. Dreamtech Press :: Chapter 1 3 . organizations. a problem is solved by adopting a scientific approach.  Economics as a Social Science: Implies that economics is a study of behavior patterns of human beings. Therefore. which involves collecting and analyzing data and making related laws and theories. and nations utilize their limited resources to achieve maximum profit. © 2012.

national income. and price levels. Gross Domestic Product (GDP). Dreamtech Press :: Chapter 1 4 .BRANCHES OF ECONOMICS  Microeconomics: Refers to a branch of economics that examines the performance and behavior of individual organizations and consumers in an economy. © 2012. It undertakes the study of economic aggregates. It involves the study of supply and demand patterns and price and output determination of individual markets. inflation. such as changes in employment. rate of growth.  Macroeconomics: Refers to a branch of economics that studies the performance and behavior of the whole economy.

--.Mansfield  Managerial economics is concerned with the application of economic principles and methodologies to the decisionmaking process within the firm or organization. Dreamtech Press :: Chapter 1 5 .Douglas © 2012. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management.CONCEPT OF MANAGERIAL ECONOMICS  Managerial economics is concerned with the application of economic concepts and economics to the problems of formulating rational decision making. --.

 Profit Theory  Helps organizations to measure the return on capital and total profit.APPLICATION OF MICROECONOMICS  Demand Theory  Refers to a theory that is applied to understand the buying behavior of consumers. © 2012. Dreamtech Press :: Chapter 1 6 . which determine the success of an organization.  Price Theory  Involves determining the price of a product or services under different market conditions.  Production Theory  Refers to the theory that explains the relationship between input and output.  Capital Theory  Enables managers to make capital and investment decisions.

 The economic environment of a country includes economic system. saving. employment. foreign trade. financial sector. national income. © 2012. investment. population. Dreamtech Press :: Chapter 1 7 . political.APPLICATION OF MACROECONOMICS  The macroeconomic theory deals with issues related to the general business environment in which an organization operates. and social environment of a country.  The environmental issues can be associated with the economic. and poli8tical system of a country.  Macroeconomics helps in the study of all the factors comprises the economic environment of a country.

and level of production  Enables managers to select production techniques and best course of action  Comprises various economic concepts. and cost © 2012. such as demand theory. demand. and capital theory. pricing. production theory. which helps in studying and analyzing dif ferent business problems  Helps organization in making future decisions with respect to economic variables.IMPORTANCE OF MANAGERIAL ECONOMICS  Helps in taking decisions related to type of product. supply. Dreamtech Press :: Chapter 1 8 . such as price. investment.

IMPORTANCE OF MANAGERIAL ECONOMICS (CONTD. such as demand. supply. employment.)  Applies dif ferent economic theories and tools to the real world business environment  Enables organizations to determine and analyze factors that af fect business decisions  Helps in formulating business policies  Helps in assessing relationship between dif ferent economic variables. and profit © 2012. Dreamtech Press :: Chapter 1 9 . income.

It is a new and emerging discipline. Managerial economics is only a normative science. It is an extremely theoretical subject. It is a traditional and well-established discipline.DISTINCTION BETWEEN ECONOMICS AND MANAGERIAL ECONOMICS Economics It is a science that studies ‘human behavior’ with respect to unlimited wants and limited resources. It is a practical subject. 10 © 2012. Economics is a positive as well as normative science. Dreamtech Press :: Chapter 1 . Managerial Economics It is a science that studies ‘managerial behavior’ with respect to economic principles used for business decision making.

organizations in maximizing profits.) Economics It deals with a set of economic principles. Dreamtech Press :: Chapter 1 11 . © 2012. and profit.DISTINCTION BETWEEN ECONOMICS AND MANAGERIAL ECONOMICS (CONTD. It studies only economic factors of a problem. such as It deals with theories that help rent. It deals with the theories of distribution. Managerial Economics It applies economic principles in business decision making. interest. It studies both economic and noneconomic factors of a problem. wages.

MANAGERIAL ECONOMICS IN OTHER DISCIPLINES  Mathematics  An application of mathematical tools in economic concepts not only provides clarity. accounting helps an organization to know its functioning and performance. and statistical tools to build models for solving various business problems. Dreamtech Press :: Chapter 1 12 . On the other hand. but also helps in designing a logical framework to measure relationship between different economic variables.  Management theory and accounting  Management theories help in determining the behavior of an organization while it is striving to achieve certain predetermined goals and objectives. © 2012. mathematical techniques.  Operational Research  Makes use of different economic concepts.  Statistics  An organization uses various statistical tools to collect and analyze business data as well as to check the validity of the data before it is applied to business analysis.

ROLE OF A MANAGERIAL ECONOMIST     Forecasting sales of an organization Performing individual market research Performing economic analysis of rival organizations Analyzing the pricing policy of the industry. thereby formulating the pricing policy of the organization Performing investment analysis Assisting the top management in making decisions related to trade and public relations and foreign exchange Performing capital budgeting and production planning Measuring the earning capacity of an organization Keeping the top management informed regarding any changes in the business environment © 2012. Dreamtech Press :: Chapter 1      13 .

 For whom to produce: Refer s to a problem related to the distribution of products and ser vices among the dif ferent sector s of the economy.  How to produce: An organization also faces problems related to the selection of techniques to be used for producing goods or ser vices. © 2012.  Economical u se of resources: Refers to a problem of making optimum use of limited resources so that the wants of human beings can be satisfied.MAJOR ECONOMIC PROBLEMS  What to produce: An organization faces problems related to the selection of a product to be produced in the present market conditions to get maximum profit.  Problem related to g rowth: Refer s to the problem related to the continuous development of the economy. Dreamtech Press :: Chapter 1 14 .

 Defining the problem: Refers to the second step in which the actual problem of an organization is identified. It is necessary for an organization to define the objectives of taking a particular decision.  Finding out alternatives: Refers to the step in which all the possible alternatives are generated for solving a problem. © 2012. Dreamtech Press :: Chapter 1 15 .  Identifying the causal factors: Involves determining the factors that may af fect the decision.DECISION MAKING PROCESS  Setting Objectives: Refers to the first step of the decision making process.

)  Collecting information: Involves gathering data with respect to the alternatives generated so that they can be properly analyzed. © 2012.  Evaluating information: Refers to the step in which the collected data is analyzed so that best alternative can be selected.DECISION MAKING PROCESS (CONTD.  Implementing the alternative and monitoring results: Refers to the last step in which an organization puts the selected alternative into practice. Dreamtech Press :: Chapter 1 16 .

© 2012. and nations utilize their limited resources to achieve maximum profit. organizations. market structure. households. Dreamtech Press :: Chapter 1 17 . pricing. level of production. namely microeconomics and macroeconomics. and extent of competition.  Managerial economics is an applied branch of economics that deals with economic concepts and tools used in business decision making.  These business problems can be related to demand and supply prospects of an organization.  Managerial economics deals with the analysis of economic theories and laws to solve business problems and take decisions based on rational thinking.RECAP  Economics studies how individuals.  Economics is divided into two parts.