Introduction to Managerial Economics

Summary:

Managerial Economics:

The discipline of managerial economics deals with aspect of economics and tools of
analysis, which are employed by business enterprises for decision making. Business and
industrial enterprises have to undertake varied decisions that entail managerial issues and
decisions. Decision –making can be delineated as a process where a particular course of
action is chosen from a number of alternatives. This demands an unclouded perception of
the technical and environmental conditions, which are integral to decision making. The
decision maker possesses a through knowledge of aspects of economic theory and its tools
of analysis, which integral to decision making. The basic concepts have been culled from
microeconomic theory and have been furnished with new tools of analysis.

Characteristics of Managerial Economics

Following are the characteristics of managerial economics

 Micro Economics
 Normative Economics
 Pragmatic
 Uses theory of firm
 Takes help of Macro Economics
 Aims at helping the Management

Scope of Managerial Economics:

The scope of managerial economics includes following subjects

 Theory of Demand
 Theory of Production
 Theory of Exchange or price theory
 Theory of Profit
 Theory of Capital & Investment
 Environmental Issues
Importance of Managerial Economics:
Spence and Siegelman have described the importance of managerial economics in a
business and industrial enterprise as follows:

 Reconciling Traditional Theoretical Concepts to the Actual Business Behaviour and

Conditions
 Estimating Economic Relationships
 Predicting Relevant economic Quantities
 Understanding Internal and External Forces
 Basis of Business policies

Basic Economics Tools in Managerial Economics:

Following are the basic economic tools

 Opportunity cost principle

 Incremental principle
 Principle of the time perspective
 Discounting principle
 Equi-marginal principle

Role and Responsibilities of a Managerial Economist

 Demand Estimation and Forecasting

 Preparation of business/sales forecast

 Analysis of the market survey

 Analyzing the issues and problems of the concerned industry.

 Assisting the business planning process of the firm

 Discovering new and possible fields of business

 Advising on pricing, investment and capital budgeting policies

 Evaluation of capital budgets

 Building micro and macroeconomic models

 Directing economic research activity

 Briefing the management on current domestic and global economic issues and
emerging challenges.
Self Assessment Test
Broad Questions:
1. How is managerial economics applied in analysis and decision-making?
2. Why managers need to know economics? Explain the importance of
managerial economics.

Short Notes:
a) Meaning and definitions of managerial economics.
b) Application of managerial economics.
c) Theories of managerial economics.
d) Characteristics of managerial economics.
e) Optimization and forecasting in managerial economics.

Multiple Choice Questions:

1. Match the following

a) Managerial Economics i) Managerial Economic Tools

b) Incremental principle ii) Scope of Managerial Economics
c) Uses of Theory of Firm iii) Joel Dean
d Price Theory iv) Characteristics of Managerial Economics
)

2. Managerial economics generally refers to the integration of economic theory

with business
a) Ethics
b) Management
c) Practice
d) All of the above

3. Economists regard decision making as important because:

a) The resources required to satisfy our unlimited wants and needs are finite,
or scarce.
b) It is crucial to understand how we can best allocate our scarce resources to
satisfy society’s unlimited wants and needs.
c) Resources have alternative uses.
d) All the above.

4. Which of the following is not the subject matter of Managerial Economics?

a) Should our firm be in this business?
b) How much should be produced and at price should be kept?
c) How will the product be placed in the market?
d) How should we decrease unemployment in the economy?