Micro Economics- is the social science that studies the implications of incentives and decisions, specifically about

how those affect the utilization and distribution of resources. Microeconomics shows how and why different
goods have different values, how individuals and businesses conduct and benefit from efficient production and
exchange, and how individuals best coordinate and cooperate with one another

Managerial Economics- is a branch of economics involving the application of economic methods in the managerial
decision-making process and the integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by the management

Nature of Managerial Economics

Economics as a Science
To consider anything as a science, first, we should know what science is all about? Science deals with systematic
studies that signify the cause and effect relationship. In science, facts and figures are collected and are analyzed
systematically to arrive at any certain conclusion. For these attributes, economics can be considered as a science.
However, economics is treated as a social science because of the following features:

 It involves a systematic collection of facts and figures.

 Like in science, it is based on the formulation of theories and laws.
 It deals with the cause and effect relationship.
Economics as an Art
It is said that “knowledge is science, action is art.” Economic theories are used to solve various economic problems
in society. Thus, it can be inferred that besides being a social science, economics is also an art.

Scope of Managerial Ecomonics

1.Demand Analysis and Forecasting

-A business firm is an economic organization which engaged in transforming productive resources into goods that
are to be sold in the market.Part of Managerial decision making depends on the accurate estimate of
Demands.Demand Analysis identifies a number of factors influencing the demand of the product.Forecasting or
forecast of sales revenue serves as guide to the management for preparing of production schedules and employee
resources.

2.Cost and Production Analysis

-A firms profitability depends on its cost of Productions or Cost of Sales. Managers would prepare the cost
estimates of a range of output , identify causes of variations. Taking considerations the degree of uncertainly in
production and cost calculations. Productions analysis to avoid wastages of materials and time
3.Price Decisions, Policies and Practices

-Price is the main factor of the revenue of the firm and correctness of the price decisions is the measure
determining factors of the success of the business. The most important aspect to dealt with is Price determination
in various market forms, pricing methods, differential pricing, Product line pricing, and price forecasting.

4- Profit Management

-Profit provides the chief measure of the success of the firm.Economics tells us that profit are the reward for
uncertainly bearing and risk taking. Successful reduction of uncertainly the higher the profit earned.Profit Planning
and Profit Measures constitute the most challenging area of Economics.

5.Capital Management

-Capital Management implies and control of expenditures because it involves a large sum of and moreover
problems in disposing the capital assets that they require considerable time and labour.The main topics dealt with
under capital Management are the cost of Capital, rate fo return and selection of projects.

2. What is Elasticity of Demand? Explain Price and Income, Elasticity of Demand

used in managerial decision making process.

Elasticity of demand -It determines the ratio of change in the proportion of one variable to another variable. For
example- the income elasticity of demand, the price elasticity of demand, the price elasticity of supply, etc

Price Elasticity of Demand

-Measures the responsiveness of the quantity of demand of a particular product as a result of the change in price
levels.

- Products can be categorize as elastic, inelastic and unitary elastic

Income Elasticity of demands

-Measures the responsiveness of the quantity of demands as a result of change in consumers income level.

- Products can be categorize as inferior, luxury , normal ,necessities.

Elasticity of demand plays a crucial role in the pricing decisions of the business firms and the
Government when it regulates prices. The concept of price elasticity is also important in judging the effect
of devaluation or depreciation of a currency on its export earnings

With elastic demand, total revenue will decrease if the price is raised

3.What is Empirical Production Function? Explain the optimum combination of

inputs.

 Linear Homogeneous Production Function: ...

 Cobb-Douglas Production Function: ...
 Constant Elasticity of Substitution Production Function: ...
 Variable Elasticity Substitution Production Function

The optimal input combination is that input combination which maximizes output given the costs
faced by the firm. Characteristics of the Optimal Input Combination 1. The optimal input
combination occurs where the slope of the isoquant is equal to the slope of the isocost curve.

What is the optimal combination

The optimum factors combination or the least cost combination refers to the combination of factors

with which a firm can produce a specific quantity of output at the lowest possible cost.

What are the technical conditions of optimal combinations of inputs?

The first order conditions state that the variable factors are combined in an optimal manner when
the ratio of marginal products is equal to the ratio of factor prices. This optimal combination is
called the least cost combination of inputs.

4. What do you mean by Monopoly? How price and output is determined in short

and long run in Monopoly Competition?

Monopoly- Under this theory, the dominance of a single entity is studied in a particular field.

Long Run Monopoly-A monopolist can determine its profit-maximizing price and quantity by analyzing the
marginal revenue and marginal costs of producing an extra unit. If the marginal revenue exceeds the marginal
cost, then the firm should produce the extra unit.

Short Run Monopoly

- Short-run price is determined by short-run equilibrium between demand and supply. Supply curve in the short
run under perfect competition is a lateral summation of the short-run marginal cost curves of the firm
5. What is Cost of Capital? Explain its structure and role in international competiveness

Cost of capital is a useful corporate financial tool to assess big projects and investments, with the intent to limit
costs. Cost of capital is a necessary economic and accounting tool that calculates investment opportunity costs and
maximizes potential investments

The cost of capital is very important concept in the financial decision making. Cost of capital is the measurement of
the sacrifice made by investors in order to invest with a view to get a fair return in future on his investments as a
reward for the postponement of his present needs. On the other hand from the point of view of the firm using the
capital, cost of capital is the price paid to the investor for the use of capital provided by him. Thus, cost of capital is
reward for the use of capital. The progressive management always likes to consider the importance cost of
capital while taking financial decisions as it’s very relevant in the following spheres:

Designing the capital structure

Capital budgeting decisions

Comparative study of sources of financing

Evaluations of financial performance

Knowledge of firms expected income and inherent risks

Financing and Dividend Decisions