1. Discuss the historical background of Managerial Economics?

Managerial Economics can be defined as combination of economic theory with business

practices so as to ease decision-making and future planning by management. Managerial
Economics assists the managers of a firm in a rational solution of obstacles faced in the firm’s
activities. It makes use of economic theory and concepts. It helps in formulating logical
managerial decisions. The key of Managerial Economics is the micro-economic theory of the
firm. It lessens the gap between economics in theory and economics in practice. Managerial
Economics is a science dealing with effective use of scarce resources. It guides the managers in
taking decisions relating to the firm’s customers, competitors, suppliers as well as relating to the
internal functioning of a firm. It makes use of statistical and analytical tools to assess economic
theories in solving practical business problems.
Study of Managerial Economics helps in enhancement of analytical skills, assists in rational
configuration as well as solution of problems. While microeconomics is the study of decisions
made regarding the allocation of resources and prices of goods and services, macroeconomics is
the field of economics that studies the behavior of the economy as a whole (i.e. entire industries
and economies). Managerial Economics applies micro-economic tools to make business
decisions. It deals with a firm.
The use of Managerial Economics is not limited to profit-making firms and organizations. But it
can also be used to help in decision-making process of non-profit organizations (hospitals,
educational institutions, etc). It enables optimum utilization of scarce resources in such
organizations as well as helps in achieving the goals in most efficient manner. Managerial
Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis
and determination of demand.
Managerial economics uses both Economic theory as well as Econometrics for rational
managerial decision making. Econometrics is defined as use of statistical tools for assessing
economic theories by empirically measuring relationship between economic variables. It uses
factual data for solution of economic problems. Managerial Economics is associated with the
economic theory which constitutes “Theory of Firm”. Theory of firm states that the primary aim
of the firm is to maximize wealth. Decision making in managerial economics generally involves
establishment of firm’s objectives, identification of problems involved in achievement of those
objectives, development of various alternative solutions, selection of best alternative and finally
implementation of the decision.
Business firms or of other management units use application of economic principles to decision-
making. The basic concepts are derived mainly from microeconomic theory, which studies the
behavior of individual consumers, firms, and industries, but new tools of analysis have been
added. Statistical methods, for example, are becoming increasingly important in estimating
current and future demand for products. The methods of operations research and programming
provide scientific criteria for maximizing profit, minimizing cost, and selecting the most
profitable combination of products. Decision-making theory and game theory, which recognize
the conditions of uncertainty and imperfect knowledge under which business managers operate,
have contributed to systematic methods of assessing investment opportunities.

2.Explain how Managerial Economics is different from Economics and Management.

ECONOMICS - In its most simple and concise definition, economics is the study of how society
uses its limited resources. Economics is a social science that deals with the production,
distribution, and consumption of goods and services. Economics focuses heavily on the four
factors of production, which are land, labor, capital, and enterprise. These are the four
ingredients that make up economic activity in our world today and can each be studied
individually. Economics is split into the following two broad categories of study:
 Macroeconomics - the branch of economics that studies the overall working of a national
economy. It is more focused on the big picture and analyzing things such as growth,
inflation, interest rates, unemployment, and taxes. When you hear the Federal Reserve is
raising interest rates or that the national unemployment rate is 7.5%, you are hearing
about macroeconomic topics.
 Microeconomics - the branch of economics that studies how households and businesses
reach decisions about purchasing, savings, setting prices, competition in business, etc. It
focuses at the individual level, while macroeconomics looks at the decisions that affect
entire countries and society as a whole.

MANAGEMENT: It is the process of administering and controlling the affairs of the

organization, irrespective of its nature, type, structure and size. It is an act of creating and
maintaining such a business environment wherein the members of the organization can work
together, and achieve business objectives efficiently and effectively. Management acts as a guide
to a group of people working in the organization and coordinating their efforts, towards the
attainment of the common objective. In other words, it is concerned with optimally using 5M’s,
i.e. men, machine, material, money and methods and, this is possible only when the proper
direction, coordination and integration of the processes and activities, to achieve the desired
results.

MANAGERIAL ECONOMICS: Managerial Economics refers to the firm’s decision making

process. It could be also interpreted as “Economics of Management”. Managerial Economics is
also called as “Industrial Economics” or “Business Economics”. Managerial Economics bridges
the gap between traditional economics theory and real business practices in two days. First it
provides a number of tools and techniques to enable the manager to become more competent to
take decisions in real and practical situations. Secondly it serves as an integrating course to show
the interaction between various areas in which the firm operates. the main focus in managerial
economics is to find an optimal solution to a given managerial problem, the problem may related
to production, reduction or control of cost, determination of price of a given product or service,
make or decisions, inventory decisions, capital management or profit planning and management,
investment decisions or human resource management. While all these are the problems, the
managerial economics makes use of the concepts, tools and techniques of economics and other
related discipline to find an optimal solution to a given managerial problem.

3. What are the concerns which gave credence to the separate treatment of managerial
Economics?
Managerial economics can be characterized as the branch of economics which focuses on the
appliance of microeconomics scrutiny and analysis for the aspect of decision-making in business.
This branch of economics plays the role of mediator between the theories of economics and
practical logics of economics.  It is a discipline that amalgamates administrative practice with the
theories of economics. This particular discipline provides impactful tools and approaches related
to the making of managerial policy. The following points indicate the concerns which gave
credence to the separate treatment of managerial Economics:
  It gives guidance for identification of key variables in decision-making process.
 It helps the business executives to understand the various intricacies of business and
managerial problems and to take right decision at the right time.
 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
decision-making 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.

Part II: Case Questions

1. John operates a small shop specializing in party favors. He owns the building and supplies all
his own labor and money capital. Thus, john incurs no explicit rental or wage costs. Before
starting his own business John earned $1,000 per month by renting out the store and earned
$2,500 per month as a store manager for a large department store chain. Because John uses his
own money capital, he also sacrificed $1,000 per month in interest earned on U.S. Treasury
bonds. John’s monthly revenues from operating his shop are $10,000 and his total monthly
expenses for labor and supplies amounted to $6,000. Calculate Andrew’s monthly accounting
and economic profits.
Given
Total revenue = 10000
Total Explicit cost = 6000
Implicit costs
Rent= 1000
Salary = 2500
Interest income =1000
Total implicit costs = Rent+ salary+ interest income
= 1000+2500+1000
Total implicit cost = 4500
Economic profits are equal to total revenue less total economic costs
Π = TR– TC Explicit – TC Implicit
= $10,000- $6,000- $4,500
Economic profit (loss) =$(500)

Accounting profits are equal to total revenue less total explicit costs.
Total revenue = $10,000
Total explicit costs = 6,000
ΠA = TR- TC Explicit
= $10,000-$6,000
Accounting profit= $4,000