Definition, Nature, Scope

Managerial economics is a discipline which

deals with the application of economic theory
to business management. It deals with the use
of economic concepts and principles of
business decision making. Formerly it was
known as "Business Economics" but the term
has now been discarded in favour of
Managerial Economics.
Managerial Economics may be defined as the
study of economic theories, logic and
methodology which are generally applied to
seek solution to the practical problems of
business. Managerial Economics is thus
constituted of that part of economic knowledge
or economic theories which is used as a tool of
analysing business problems for rational
business decisions. Managerial Economics is
often called as Business Economics or
Economic for Firms.

Definition of Managerial Economics:

' Managerial Economics is economics applied in
jecision making. It is a special branch of
~conomics bridging the gap between abstract
:heory and managerial practice." - Haynes,
\Aote and Paul.
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"Managerial Economics is economics applied in
decision making. It is a special branch of
economics bridging the gap between abstract
theory and managerial practice." - Haynes,
Mote and Paul.
"Business Economics consists of the use of
economic modes of thought to analyse
business situations:' - McNair and Meriam
"Business Economics (Managerial Economics)
is the integration of economic theory with
business practice for the purpose of facilitating
decision making and forward planning by
management." - Spencerand Seegelman.
"Managerial economics is concerned with
application of economic concepts and
economic analysis to the problems of
formulating rational managerial decision:' -
Mansfield
Managerial Economics

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• The primary function of

management executive in a
business organisation is decision
making and forward planning.
• Decision making and forward
planning go hand in hand with each
other. Decision making means the
process of selecting one action from
two or more alternative courses of
action. Forward planning means
establishing plans for the future to
carry out the decision so taken.
• The problem of choice arises
because resources at the disposal
of a business unit {land, labour,
capital, and managerial capacity)
are limited and the firm has to make
the most profitable use of these
resources.
• The decision making function is that
of the business executive, he takes
the decision which will ensure the
most efficient means of attaining a
desired objective,
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' .,,, Money ', '5'
//, Payment for final ' ,
,✓ goods and services ',,
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Consufflffi of goods:
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Firms:
Prooocers d goods:
Owners of ilpUtS ~er.. u l'8SCU08S
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~~ ' , (A + W + I + P) ,,,/ /J
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Fig. 2.1: Circular Flow of Income and Expenditure ,n a

Two-sector Economy
 Scope of Managerial
Economics
:! 1. Demand Analysis and Forecasting
<!.• 2. Cost Analysis
(!) 3,. Production and Supply Analysis
@ 4. Pricing Decisions, Policies and Practices
® 5. Profit Mlanagement, and .....-

~ 6. Capital Management
 Rol,es and Responsibilities of
Managerial Eoono1mist
1
: • H:,e stud;ie·s the ecio 1r1or11i c pattern1s at macr,o,=
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level and analysis it's slignificance to the

specific firm he is working in.
•• He has to consistently ,e xamine the
probabilities of transform1ing an ,ever-
changing economic environment into
profitable business avenues.
® He assists the business p.lanning process of
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· ,. ® ldf1 a so arilf'es oostibe J'.t amalMsis.- ·,,___.
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 Roles and Responsibilities of
Managerial Economist
® In. '°.rder _to perf~rm all these_roles.~, a managerial
ec:0no m11st has, to condu ct anr e·fabo.rate
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stat.isticall anailysi.sm
® ~;P~~~t ~:hv;~~a~:e~~~,~~st have ability to
@ ~~also provides management with egon.pmi~
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0:n: su ch .as ta.x rate~., co,mpet.,to.r·s pnce.
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and pro duct, etc . Th ey give thei·r v~Juable~. ·

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. advice to gQvemm.erJtJu,..thorities ,c\S~well. ,

~-At"time·S:,·f; f·btai:ia·g~r.ial fcOOOmisfb . I •·C:J.
·gremr . s .eecffies fan , ,·, ,· a1 : em·
 Roles and Responsibilities of
Managerial Economist
I' ® He, studies the economic patterns at macro~
level and analysis ifs significance to the
specific firm he is working in.
® He has to consistently examine the
probabilities of transforming an ever-
changing economic environm~nt into
profitable business avenues. __
g , ·o -ess o.
@ He assists.the lbosine.s&t"Qfat-if.li _
·- . a firm,•. -
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@ ~e, a.ss_ ists t~~ :11:ianage,1~;_ n the decis·i1ons-p_
,ent i1 e·rta·i_~n1ng t 0 1 1

1nte·1ma.l ,;fu,nie::·t1,o-1n11n,g o'f a. hrm, such asi cha.1n!ge·:s ~1n1pr1ce

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i11ve·S/tm1en;t plan,si~ ty·~pe •O'f ,g'oiod.s,/services ·t0 be produced,,

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ii.np,uts f0 be·1 us,e,d:•. te·Ch1n1i~ques, of produ,c:tion1to be

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1em1plo ·1ed, ,e·xp,a,nsio.n/ co :n1tra,cti·o;n1of _firm:~ajlo,catio,n1,o·f

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capita(, location of new plants. quantity o,'I output to be

fu~e~a~~~·;~~~~ii~~~b~:r~~~~~~~~ent, srues
® lhn additi,o~.• a 1miana.g11erial e-co 1~:o~n,is1thas 'to -?na~yz1
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,chan,g,es 1rn m·acr:o.., ,e,con1om1l•c 1:ndlca'l ors su'c:.h .a_:s n,ational' 1 1

irncof1le 1. 1populatio:n1~. lbusiiness ,c·ycl e·s:J_~:n:d tl·1eiir pos:sible,

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effecl :c,n _"!lh.1e :ti rm)s:.·1~rr:rc.t.iorfli@Q. ..
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 Roles and Responsibilities of
Managerial Economist
i'•He· is ,a.~s 0 i,nv·o,~lved in adv·i:cing th1e m,a,n,a g,e:m ent on
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p·ub lic rela·Ho,ns,~'for,ei,g n'. exc~an,91e,. a,nd tra,dl1e.;. H_,e

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guides the firm .on the t1~ely impact of ,cha_ ng~s_1~

mo n eta.ry an,d f:1;sca~
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1pi;ohc·y on the firms fu :nct1,on1ng.
,. He-,also• makes an, ec 01 1
n,om ic analy·si:s of the firms i111
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co,m:petitio n. 1 He h;as t,o, c olle,c.t ie•ccin,io ,m ic d.a ta an,d

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ex,ami·ne au icruci:a:I in·f,o rmati10,n1.a.b 0Lrt the

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environment in which the firm operates.

·• The mo~t s_ignificant function of a managerial
ec.,o.no,jm!1st 1s to, c-o ndu ct a detailed' research o;n
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indu,striial m.arket.
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