MANAGERIAL ECONOMICS

AND
FINANCIAL ANALYSIS

LECTURE-2
TOPIC : MANAGERIAL ECONOMICS
 MANAGERIAL ECONOMICS
Manager : A person who directs resources to achieve the stated goal.
Economics : The science of making decisions in the presence of scarce
resources.

Managerial Economics: The study of how to direct scarce resources in

the way that most efficiently achieves a managerial goal.

Definition and Meaning of Managerial Economics:

According to McGutgan and Moyer:

“Managerial economics is the application of economic theory and

methodology to decision-making problems faced by both public and
private institutions”.
 MANAGERIAL ECONOMICS
According to Spencer and Siegelman:

“The integration of economic theory with business practice(decision science) for the purpose
of facilitating decision-making to get optimal solution to business problems”.
 Nature and Scope of Managerial Economics:
Nature of Managerial economics:

1.Managerial economics is an Art as well as Science

2.Managerial economics is a social science
3.Managerial economics is a positive and normative science
4.It is objective oriented
5.It involves in decision making process
6.It involves in problem-solving
7.It aids the management in forecasting and evaluating the trends of the market.
8. Managerial economics is pragmatic.

The scope of managerial economics includes following subjects:

(i) Theory of Demand

(ii) Theory of Production
(iii) Theory of Exchange or Price Theory
(iv) Theory of Profit
(v) Theory of Capital and Investment
 CONCEPTS OF MANAGERIAL ECONOMICS
• Scarcity: Scarcity is the limited availability of a commodity, which may be in
demand in the market or by the commons. Scarcity also includes an individual's
lack of resources to buy commodities.
Ex: Demand for faculty > Supply of faculty = Scarcity

• Utility: Usefulness or multi-functionality of commodity to satisfy any type of

need.

• Marginal: A change in dependent variable due to the one additional unit change
in the independent variable.
Ex: By consumption of 10 units of raw material along with other resources to
produce 100 units of output.
By one additional units 11units of raw material along with other resources to
produce 105 units of output.
 CONCEPTS OF MANAGERIAL ECONOMICS
• Marginal utility: Change in total utility as a result of consuming one
additional unit of a commodity.
Marginal utility is the added satisfaction that a consumer gets from having one
more unit of a good or service.To determine how much of an item consumers
are willing to purchase.
Ex:If you hungry

Quantity Marginal Utility

1st Apple 100%

2nd Apple 80%

3rd Apple 60%

4th Apple 40%

5th Apple 20%

CONCEPTS OF MANAGERIAL ECONOMICS
• Equi-marginal:This law states that how a consumer allocates his money
income between various goods so as to obtain maximum satisfaction.

UNITS MU OF MU OF MU OF MU OF
(WITH 10/-) PRODUCT PRODUCT PRODUCT PRODUCT
A@ PRICE A/Price of A B@ PRICE A/Price of B
2/- 1/-

1 100 50 80 80
2 98 49 60 60
3 70 35 40 40
4 60 30 35 35
5 40 20 25 25
CONCEPTS OF MANAGERIAL ECONOMICS
• Discounting Principle :The concept of discounting future is based on the
fundamental fact that a rupee now is worth more than a rupee earned later.
• Time perspective:Principle of time perspective:
“a decision by the firm should take into account of both short-run and long-
run effects on revenues and cost & maintain the right balance between the
long run and short run.
Short period : Some inputs/factors remains constant while others are variable.
Long period : All factors of production can become variable.
• Braek even : The break even point is the point at which revenue equals
expenses/costs.or
The level of output at which Total Revenue = Total Cost
Where TR = Quantity X Price , TC = Total Fixed Cost + Total Variable Cost
• The point at which No Gains No losses
 Break-even quantity refers to the number of units a small business must sell to
cover all costs, while break-even revenue refers to the sales dollar amount it
must generate to cover its costs.
 CONCEPTS OF MANAGERIAL ECONOMICS

• Break-even quantity refers to the number of units a small business must sell to
cover all costs.
B.E.Q : Firm producing single product.
Break even quantity = Total Fixed Cost/(Price – Average Variable Cost)
Where Total variable cost = Quantity X Average variable cost
Average variable cost = Total variable cost/Quantity

EX:TFC = 10,000/- P = 25/- AVC = 15/-

Sol: BEQ = 10000/(25-15) = 1000 UNITS

Proof: TR = TC
TR = QP = 1000 X 25 = 25000/- TC = TFC+TVC = 10000+15000 = 25000/-
HENCE,TR=TC
 CONCEPTS OF MANAGERIAL ECONOMICS

• Break-even revenue refers to the sales dollar amount it must generate to cover its costs.
B.E.S.R :Firm producing multiple products
B.E.S.R = TFC/Contribution margin ratio
Where CMR(Contribution margin ratio) : Total earnings available to pay fixed expenses and
generate a profit.
CMR(Contribution margin ratio) = (Sales Revenue- TVC)/SR

EX: TFC = 25000/- TVC = 75000/- SR = 1,50,000/-

B.E.S.R = TFC/CMR = 25000/(0.5) = 50000/-

Where CMR = SR-TVC/SR = 0.5

Proof: TR = SR – BESR = 1,50,000-50,000 = 1,00,000/-

TC = TVC+TFC=25000+75000=1,00,000/-
HENCE TR=TC
 CONCEPTS OF MANAGERIAL ECONOMICS

• Risk:We cant forecaste the future changes.There is no guarentee that

present economic variables will continue in the future.
 Certainty:Definite outcome from a known change.
 Uncertain: Indefinite outcome from unknown change.