MANAGERIAL ECONOMICS (22MBA22)

Module-1 Introduction: Managerial Economics

Meaning, Nature, Scope & Significance, Uses of Managerial Economics, Role and Responsibilities of Managerial
Economist. Theory of the Firm: Firm and Industry, Objectives of the firm, alternate objectives of firm.
Managerial theories: Baumol’s Model, Marris’s model of growth maximization, Williamson’s model of managerial
discretion.

Introduction:
Business runs on various theories that are explained in Economics. Managerial economics is the stream of
management studies that emphasizes solving problems in businesses using the theories in micro and macro
economics. This branch of economics is used by firms to not only find a solution to problems in daily running but
also for long-term planning. Managerial economics is a practical application of theories in economics.

Definition:
“Managerial economics is concerned with the application of economic concepts and economic analysis in to the
problems of formulating rational managerial decisions.” – Edwin Mansfield
“Managerial economics is the integration of economic theory with business practice for the purpose of facilitating
decision making and forward planning by management.” – Spencer and Sieglman

Economic Theory Business Management

Managerial Economics

Nature:

1. Art and science: managerial economics required a lot of creativity and logical thinking to come up with a
solution. A managerial economist should possess the art of utilizing his capabilities, knowledge and skills to
achieve the organizational objective. Managerial economics is also considered as a stream of science as it
involves the application of different economic principles to solve business problems.
2. Microeconomics: In managerial economics problems of a particular organization are looked upon rather than
focusing on the whole economy. Therefore it is termed as a part of microeconomics. Micro economics deals
with the individual units of an economy. Business economics is micro economics in nature because it is based
on the concepts of micro economics.
3. Uses macro economics: any organization operated in a market that is a part of the whole economy, so external
environment affect the decisions within the organization. Managerial economics uses the concept of
macroeconomics to solve problems. Managers analyze the macroeconomic factors like market conditions,
economic reforms, and government policies to understand their impact on organization.

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MANAGERIAL ECONOMICS (22MBA22)

4. Multi-disciplinary: managerial economics uses different tools and principles from different disciplines like
accounting, finance, statistics, mathematics, production, operation research, human resource, marketing etc.
this helps in coming up with a perfect solution.
5. Management oriented and pragmatic: Managerial economics is a tool in the hands of managers that aids them
in finding appropriate solutions to business-related problems and uncertainties. As mentioned above,
managerial economics also helps in goal establishment, policy formation, and effective decision making. It is a
practical approach to find solutions.

Difference between micro and macro economics:

Micro economics Macroeconomics

The branch of economics that studies the behavior of an
individual consumer, firm, family is known as
microeconomics
Concerned with particular households, firms and
industries
Assumptions – rational behavior of individual
Analysis demand and supply of labor
Individual economic variable
Applied to operational or internal issues
It takes into account small components of the whole
economy
It is known as price theory
It concentrate on the optimization goals of individual
consumer and producers
The branch of economics that studies the behavior of the
whole economy is known as macro economics
National income, general price levels, national output,
unemployment and poverty
Aggregate volume of output of an economy, the extent
to which its resources are employed
Analyzes total employment in the economy
Aggregate economic variables
Environment and external issues
It takes into consideration the economy of the country as
a whole
It is known as income theory
It concentrate on the optimization of the growth process
of the entire economy

Scope & Significance:

1. Demand Analysis and Forecasting: The very reason for the operation of any business firm is the demand for its
product in the market. All significant decisions of the firm depends upon the correct estimation in demand
analysis managers seeks to collect information about the various factors which are going to affect demand for a
firm's product, various substitutes available in the market and trends prevailing in the market. All these factors
have important bearing on the production schedules. Demand analysis and forecasting is therefore really
essential for planning business activities and occupies a relevant place in managerial economics.
2. Cost Analysis: Another important area of managerial economics is cost analysis. Whenever managers plan for
production, the foremost factors that comes to their mind is the cost of production. Cost analysis facilitates
management decisions. The factor that leads to variations in costs is beyond the control of managers and
therefore must be recognized. In the absence of cost estimates one may not be able to properly plan its profits
& also not able to determine its pricing policies.
3. Production Analysis: Managers while planning for production pays attention to the relation between cost and
output, what are the various factors of production which are required to carry on manufacturing, what is the
behavior of various cost in relation to the factors, how far we are able to achieve economies of scale. Thus,
production analysis also another important domain.

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MANAGERIAL ECONOMICS (22MBA22)

4. Pricing Policies: Pricing is a very important area of managerial economics. Managers have to spent a lot of
time on forecasting & determining the price of products in the various market structures as price acts as a major
source of revenue .There are various methods to determine the prices but the choice of right method is the
greatest challenge. Wrong pricing decision will turn the firm out of the market. An accurate pricing decision
contributes a lot to the success of a business firm.
5. Profit Management: The ultimate objective of any economic organization is to earn handsome profits& is
considered as the barometer of success. But we also know that the future is` always uncertain. There is
uncertainty on account of various factors such as social , political ,economic factors ,which acts as a obstacle in
our way of objective. Thus profit planning and management is regarded as the important area of managerial
economics.
6. Capital Management: Capital is regarded as the most important resource and also require greater attention of
the managers. Capital expenditure not only have the binding on the present but also on the future profits &
once such decisions are taken these are irreversible. Therefore manager do keep focus on this aspect.
7. Advertising: Since decisions making and forward planning are the important areas of managerial economics,
therefore the managers have to plan many things about the product they are going to launch in the market. The
various activities in this regard are its design, shape, quantity, deciding about the marketing of good etc. In this
context advertising is important area of managerial Economics.
8. Environmental issues: There are many areas of macroeconomics which also becomes part of managerial
economics, since the business organization can’t work in isolation. These areas are related to general business,
social, political and demographic environment in which a business enterprise works. All these issues have great
bearing on Business activities.
9. Business cycles: Business cycles also seem to affect business decisions. Business cycles are regular
fluctuations in economic activities in the country. The various phases that constitute business cycle are
depression, recovery, boom and recession. Therefore managers have to modify their plans according to the
phase through which the business is passing out.

Uses of Managerial Economics:

1. Used for Integration of Economic Theory: Economic theory and business practice is integrated with the help of
managerial economics.
2. Used as Solution to Practical Business Problems: It acts as a mean to apply economic concepts and principles
to solve practical business problems in real life. Managerial economics helps in employing the most modern
instruments and tools to find solutions to business problems.
3. Optimum Use of Scarce Resources: It helps in making optimum use of scarce resources of a firm to maximize
profits.
4. Used for Other Objectives: The various objectives such as attaining industry leadership, expansion of market
share, etc., are achieved with the help of managerial economics.
5. Used for Overall Development: Managerial economics facilitates in making overall development of a firm.
6. Used in Making Right Decisions: A manager understands the details of business problems and taking a right
decision at the right time with the help of managerial economics

Roles and responsibility of economist:

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MANAGERIAL ECONOMICS (22MBA22)

1. Analysis of Business Operation: The meaning of internal factors or business activities is from those who come
under a particular religion or within its working area. The use of business management is controlled by them,
such as production quantity determined pricing, expansion, and contraction of the business production method
used in the firm whether to use installed capacity. Finance capital and profit management and business use and
internal elements come under this case. Managerial economists play a different role in managing management
in the following areas:
 Determining the budget for profit and sales volume in the coming years.
 In the next years, what changes should be made in the price policy and wage policies?
 What is the firm’s credit policy in the future, and what are the changes in it?
 In the upcoming years, the business should be expanded and contracted, if yes, how much?
 What steps should be taken to cut costs?
2. Increase in Profit Earning Capacity: Managerial economists can increase the state of profit by giving useful
advice to managers. The officer or officials who are appointed to give advice on financial matters to the highest
management are called managerial economists.
3. Analysis of External Factors: Business firm decisions do not affect internal factors only. But also affected by
External Factors. The external conditions are neither under the control of the firm nor in their working area. For
example, business cycles, government policies, monetary policy, fiscal policy, national income, foreign trade
policy, and the value of a government of labor law, all this is harmful and affects the firm’s future planning and
decisions. The managerial economist can continue his studies by advising continuous study and comprehensive
analysis of these factors and tell the highest management in making policies necessary adjustments.
 In what markets, are the demands, and how the market of the firm’s products is likely to be?
 What is the state of the business cycle and what will be its appearance and speed soon?
 What is the probability of the supply of raw materials and the price? And what are the possibilities they
have soon?
 What is the cost and availability of creditworthiness in the future?etc.
4. Useful Advice in Economic Matters: Providing financial advice provides assistance to managers in planning
and decision-making. Managerial Economics presents various types of advice and different types of data to
assist managers in planning and decision-making in order to take the right decision in the right direction.
5. Establishing a High Reputation And Status in the firm: The managerial economist should develop a high
reputation in the firm by building his skill in inefficiency, integrity, successful predictions, and firmness in the
firm. So, that he can find a suitable place for his firm. if he wishes to manage the financial matters provided by
him. Gets support, the complex financial problems are solved by presenting them. Then the managers will
awaken confidence and faith. If he is skilled and unsuccessful in the above work. He will sit on his prestige and
place. So, there is a need for great vigilance and integrity.
6. Reduction in Risks of Uncertainties: The managerial economist reduces the risk of the future by removing
uncertainties. It helps managers make decisions using successful pre-estimates in the business. The economist
advances in future prospects and reduces future risk.
7. Close Contact with the Source of Economic Information and Experts : The managerial economist can only play
his own responsibility. Generally, when all those financial information sources and such experts keep close
contact, provide financial information affecting the passion firms, or provide the necessary expert opinion. Not
only this, but adequate financial information will also be available as soon as possible and with close contact
with experts, it will be able to make to bring more accuracy in its analysis and conclusions which are useful in
policy and future Business planning.

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MANAGERIAL ECONOMICS (22MBA22)

8. Trustworthy Forecasting: Managerial economists make useful information on future business planning to
managers by guessing the firm’s value, sales, capital, and goods tables. Market research can be made to
improve the firm’s products. The operation and organization of any business firm depend on internal and
external elements. If managerial economists can analyze these elements and adjust their effects to a managerial
decision, then not only will uncertainties decrease but will lead to the successful operation and rapid progress
of the professional firm.
9. Economic Operation: The managerial economist can promote financial flexibility in different areas of the firm
and encourage frugalness in each sector so that the firm’s friendly operation is possible.
10. Successful Forecasting: There is an element of uncertainty in the future in front of every firm and the
managerial economist is responsible. That can reduce the risk by giving proper management of values to
business management by eliminating the future and making sure that the earlier estimation has been corrected
and that it would be easy to manage and believe in management. Thus, the business continues to have the effect
of new external conditions. Thus, the managerial economist should continue to prescribe the revised forecasts.
So, the management can make the desired adjustments in future firms’ plans and policy decisions according to
changing circumstances.
11. Efforts for Reasonable Return of Capital Employed: The aim of every business firm is to make a profit. Only
the working person attempts to achieve this goal. If business decisions and future business planning times are
not conducive. Then the managerial economists and managers have to take responsibility for them. And his
skills are reflected in him because he is able to increase the firm profitability through the constant use of
pricing and production policies and get the proper benefit from the firm’s appropriated capital. Thus, if the firm
is unable to get the proper benefit of capital adequacy, it will lose the trust of managers and its reputation will
be less. Not only this, but the firm also will not have its superiority either.
12. Reduction in Production and Distribution Costs: By analyzing the internal and external conditions of the firm,
the managerial economist reduces the production and distribution of appropriate adjustments.
13. Increase in Competition Power of the Firm: Reliable forecasts of the firm are enhanced by the lack of friendly
operation and cost, and the firm’s reputation is increased in self-power. So, the firm has more profits than
competing firms.
14. Implementation of Government policies : Due to increasing political intervention in business and industry,
managerial economists can help the firm to protect the government from harming the government’s related
economic policies. On large business firms. Large industrialists and businessmen are trying to enjoy their
services. Decision and planning are both difficult tasks in the atmosphere of uncertainties in the business area.
15. Specific Functions of Managerial Economist: The managerial economist goes into future decisions by
analyzing the internal elements and external elements in professional firms.
 what are the major functions of managerial economist
 what are the major functions of managerial economist

But nowadays his work has increased and the statements do a specific job. Which provides benefits to the
government, businessmen, individuals, and industrialists, including the following:

 Surveying different markets.

 Predicting the industry’s total demand for business.
 Analyzing pricing in different industries, and finding a suitable solution to the problem.
 Analysis of valuables and actions in competitive firms.
 Analyze the development of the economy.
 Comparative analysis of projects. Etc

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MANAGERIAL ECONOMICS (22MBA22)

16. Sweet Relations: It is the duty of a managerial economist to have a common relationship. Also among all the
workers in the firm who are employed. In this order not only to work in the atmosphere of mental peace and its
skill comes. To get cooperation and not to oppose the trend. Thus, it is clear that the managerial economist
should be cautious of the above liabilities. It should provide specialist service close to integrity, efficiency, and
realism in its work.
17. Coordination with External Situations: It helps in keeping pace with the conditions and is useful in adjusting
monetary policy, fiscal policy, and price policy in the firm’s own policies.

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