Managerial Economics

Ms. Monika Kadam

Assistant Professor
 What is Managerial Economics?
• “Economics is a study of man’s actions in the ordinary business of life: it
enquires how he gets his income and how he uses it”.
-Dr. Alfred Marshall
• Prof. Lionel Robbins defined Economics as
“the science, which studies human behavior
as a relationship between ends and scarce
means which have alternative uses”

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Nature of Managerial Economics
2. Operates against
1. Close to 3. Normative
the backdrop of
microeconomics statements
macroeconomics

6. Offers scope to
4. Prescriptive 5. Applied in
evaluate each
actions nature
alternative

7. Interdisciplinary

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Scope of Managerial Economics
ENVIRONMENTAL or
OPERATIONAL ISSUES
EXTERNAL ISSUES
• 1. Theory of demand and • 1. Economic Atmosphere
Demand Forecasting • 2. Social Atmosphere
• 2. Pricing and Competitive • 3. Political Atmosphere
strategy • 4. Trends in the working
• 3. Production cost analysis of financial institutions
• 4. Resource allocation
• 5. Profit analysis
• 6. Capital or Investment
analysis
• 7. Strategic planning

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What is the circular flow of economic activity?
• It is a model showing the basic economic
relationships within a market economy.
• It illustrates the balance between
injections and leakages in our economy.
• Half of the model includes injections, and
half of the model includes leakages.
• It shows where money goes and what it's
exchanged for.

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What are the 4 factors of production?

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How do costs, revenue, and consumer
spending relate to the circular flow model?

Consumer
Revenue Cost Income
spending

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Two Sector Economy

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Three Sector Economy

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Four Sector Economy
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The Nature of the firm: The Rationale for
the Firm, the Objective of the Firm,
Maximizing versus Satisficing

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What is nature of the firm?

• A firm is an association of individuals who have

organized themselves for the purpose of turning
inputs into output.

• Each firm lays down its own objectives which is

fundamental to the existence of a firm.
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What are the objectives of a firm?

Profit maximisation Sales maximisation

Increased market
Social/environmental
share/market
concerns
dominance

Profit satisficing Co-operatives

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Profit maximization

We assume firms are concerned with maximizing profit. Higher

profit means:
• Higher dividends for shareholders.
• More profit can be used to finance research and development.
• Higher profit makes the firm less vulnerable to takeover.
• Higher profit enables higher salaries for workers

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Profit Satisficing

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Sales maximisation
Firms often seek to increase their market share – even if it
means less profit. This could occur for various reasons:
• Increased market share increases monopoly power and may
enable the firm to put up prices and make more profit in the
long run.
• Managers prefer to work for bigger companies as it leads to
greater prestige and higher salaries.
• Increasing market share may force rivals out of business.

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Principal-Agent Problem

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What is Agency costs?

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What is constrained decision making?

• The resources at a company’s disposal are limited.

• As a result, the best approach to the business decision-

making problem demands that assets be used in such a way
that the goal is met effectively.

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 What is Economic Profit?

Economic profit is the monetary

costs and opportunity costs a firm
pays and the revenue a firm
receives.

Economic profit = total revenue –

(explicit costs + implicit costs).

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Competitive Markets

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Incompetitive Markets

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1. Investment in Research & Development.

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2. Reward for Shareholders

• Higher profit leads to higher dividends and

encourages people to buy shares.

• Low profit may make a firm the target of a

takeover bid.

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3. High Profit should attract new firms into the
industry

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4. Risk Bearing Economies: Profit can be saved and
provide insurance for an unexpected downturn, such as
recession or rapid appreciation in the exchange rate.

5. Tax Revenues

6. The incentive effect: Higher profit acts as an

incentive for entrepreneurs to set up a business.

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Economics and Decision Making
1. Macroeconomic Decisions
• Employment
• Inflation
2. Microeconomic Decisions
• Production and inventory
• Advertising and marketing
budgets

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Scope of Decision Making in Economics

Resource
Inventory
Allocation

Pricing Investment
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Steps for Decision Making

Decision
Making
Forecasting
Coming up
with
Identifying
alternatives
the goal
Problem
Definition

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The key causes of instability and risk are the following
market forces’ unpredictable behavior.

The demand and supply

Changing business environment

Government policies

External influence on the domestic market

Changes in society and politics

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What is economic problem?
• An economic method can be expressed as a problem
involving unlimited wants and limited resources.

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Business companies face the decision-making
challenges
1. To figure out what other options there are for
achieving a set of goals.
2. To choose the course of action that will accomplish
the goals in the most cost-effective manner.
3. To correctly execute the chosen course of action in
order to meet the company objectives.

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Follow the Microeconomic Forces That Drive
Good Decisions

Determine what you want to do

Gather knowledge that is important

Examine the evidence

Make a financial decision

Put your decision into action

Reconsider your choice

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