How Is Managerial Economics Useful?

 Evaluating Choice Alternatives

 Identify ways to efficiently achieve goals.
 Specify pricing and production strategies.
 Provide production and marketing rules to help maximize net profits.
 Making the Best Decision
 Managerial economics can be used to efficiently meet management objectives.
 Managerial economics can be used to understand logic of company, consumer, and
government decisions.

1
Managerial Economics of Masters in Business Study (MBS)

Managerial Economics

Course Contents:

 Introduction to Managerial Economics and Theories of Firm

 Demand analysis and forecasting
 Production and cost analysis
 Pricing theory and practice
 Risk Analysis
 Market efficiency and role of the government

References:

1. Adhikari, G.M., Paudel, R.K. and Regmi, K. (2017). Managerial Economics. Kathmandu: KEC Publication
and distributors
2. Dhakal, R. (2017). Managerial Economics. Kathmandu: Samjhana Publication
3. Mansfield, E. (1996). Managerial economics. New York: W.W. Norton and Co.
4. Petersen, H.C. and Lewis, W.C. (2008). Managerial Economics. New Delhi: Pearson Education Ltd.
5. Pappas, J.L. and Hirschey, M. (1989). Fundamentals of Managerial Economics. New York: The Dryden
Press.
6. Salvatore, D. (2012). Managerial Economics. New York: McGraw Hill. KAMAL REGMI, SHANKER

Unit 1: Introduction to Managerial Economics and Theories of firm

Concept of Managerial Economics: The concept of managerial economics was initiated after 1950’s by Prof.
Dean Joel and Practicability of managerial economics in real practice was proved by Warren E. Buffet.
oManagerial economics in its simplest form may be defined as the application of economic theory to the
problems of management.

Managerial economics is that part of economic theory which deals with the application of economic tools and
concepts to the solution of business problems or the problems of resource allocation among the competing
ends. o Managerial economics is the discipline which deals with the application of economic theory to
business management. o In conclusion, Managerial economics refers to the application of economic theory
and decision science tools to find the optimal solution to business decision problems.

Managerial economics prescribes rules for improving managerial decision. o It tells managers how action
should be undertaken to achieve organizational goals efficiently.

Managerial economics also helps managers recognize how economic forces affect organizations and describes
the economic consequences of management behavior.

2
Managerial Decision Making Process:

Managerial Decision Making Problems: -Product price and output - demand or buy -Production Technique -
Strategy Formulation -Advertising, investment etc. Managerial Economics : Use of economic concepts and
decision sciences to solve managerial decision making problems. Traditional Economics -Theory of firm -
Theory of demand and supply -Theory of consumer behavior -Theory of market -Theory of pricing etc.
Decision Making Sciences: -Mathematical economics -Econometrics -Statistical analysis -Game theory -
Optimization etc. Optimal Solution to the managerial Decision Making Problems.

Main Concern of Managerial Economics:

Opening of firms/ Industries - Operation of firms/ Industries - Out (exit ) of firms/Industries from the market.
Managerial economics believes that successful managers make good decisions and the most useful tool of
managerial decision making is the methodology of managerial economics.

Characteristics of Managerial Economics:

1. Pragmatic [Link] 3. Conceptual and Tactical 4. Theory of Firm 5. Goal-oriented 6. Coordination
between Theory and Practice 7. Wise Choices 8. Multidisciplinary 9. Help of Macroeconomics.

Issues Discussed under Managerial Economics:

Operational Issues ◦ Demand Analysis and Forecasting ◦ Production and Cost Analysis ◦ Pricing Theory and
Practices ◦ Profit Analysis and Profit Management ◦ Capital and Investment Decisions ◦ Inventory
Management ◦ Environmental Issues.

Important Questions asked in Managerial Economics:

What is the nature and trend of domestic business environment?

What is the nature and trend of international business environment?
What is the nature and impact of social costs and government policy measures

RELATION OF MANAGERIAL ECONOMICS WITH TRADITIONAL ECONOMICS:

Relationship with microeconomics ◦ Pricing, output determination, what to produce? how to produce? How
much to invest? etc.
 Relationship with macroeconomics ◦ Environmental issues ◦ Prediction of aggregate economic variables ◦
Policy issues
Note: Managerial economics differs with traditional issues in various aspects such as practicability, character,
scope, assumptions, hypothesis etc.

ROLE OF MANAGERIAL ECONOMIST: Making decisions - organizing - processing information. Specific

Decisions (i) Producing scheduling, (ii) Demand forecasting, (iii) Market research, (iv) Economic analysis of
the industry, (v) Investment appraisal, (vi) Security management analysis, (vii) Advice on foreign exchange
management, (viii) Advice on trade, (ix) Pricing and the related decisions, and (x) Analysing and forecasting
environmental factors.
3
General Tasks :
1. Organizing the resources and uses.
2. Processing the information.

USES OF MANAGERIAL ECONOMICS IN BUSINESS DECISION- MAKING:

Determination of Price of output. Demand forecasting. Allocation of resources. Determination of

output level. Determination of profit margin. Investment decision making. Maintenance of Inventories.
Environment analysis etc.

NATURE AND FUNCTIONS OF PROFIT: Meaning of Profit: ◦ Profit means different for different people
like businessman, accountant, economists, workers etc. ◦ The role and excess of profit differs in different
economies as well. ◦ Generally, Profit is the excess of income over expenditure. ◦ Profit includes various
economic concepts like opportunity cost, Fixed and Variable costs, and revenues. Petersen and Lewis, “ No
one will play the game if there is no chance of winning the prize in the form of profit.” Dean Joel, “A business
firm is an organization designed to make profits, and profits are the primary measure of its success.”

Business Vs Economic Profit:

Business Profit/Accounting Profit = TR – Explicit Cost - Explicit cost is the cost paid for external factors of
production. Economic Profit = TR- (Explicit +Implicit Cost) - Implicit Cost refers to the cost incurred for self-
owned factors of production along with normal Profit. Implicit cost = Imputed cost +Normal Profit

Functions of Profit:

Measurement of performance. o Incentive for expansion. o Incentive for new inventions and innovations. o
Ensures future capital. o Attracts new investor. o Increases risk bearing capacity. o Incentive for Research and
Development. o Main Heart of market economy. o Indicator of success and achievement etc.

Case-1:

Akshit a web designer, working as a manager of a web based company for Rs 120000 per year wants to start
his own business by investing his own money of Rs. 400000 on which he could earn 10% interest if deposited
in bank. His estimated revenue during the first year of operation is Rs 300000 and costs are salaries to
employees Rs 90000, supplies Rs 30000, rent Rs.20000 and utilities Rs 2000. a) what is business profit? b)
what is economic profit? c) If he seeks your advice on whether to start the business or not what will be your
advice and why? d) what will be your advice is he could earn only 2% interest on his own money if deposited
in bank?

Case-2:

4
Abhik working in a Bank earning Rs 15000 per month has deposited Rs. 480000 in bank which yields 5%
interest per annum. He wants to invest this money to establish his own company and works as a manager in
his own company. He has estimated total revenue Rs. 82000 per month and estimated cost of production raw
materials 50000, advertisement 10000, annual depreciation 15%, of capital worth 200000, utilities
3000/month, miscellaneous expenses 8000. Find: a) Business Profit b) Economic Profit c) If Abhik asks your
suggestion whether to start business or continue Job. What is your suggestion and why?

SURVEY OF THEORIES OF FIRM!

Profit Maximization Model:
Classical Objective – Supported by classical and neoclassical economists.
According to this objective- “The main objective of firm is to maximize profit.” Profit is the major incentive
to produce and sell goods and services in the market. Each and every business firms aim to maximize the
profit with the use of available resources. o Profit is the difference between Total Revenue (TR) and Total
Cost(TC) i.e. π = TR-TC o It means profit will be maximized when the positive difference between TR and
TC will be maximum at a particular level of output.

Assumptions:

1. Only one commodity is produced by the firm. 2. The owner himself works as the manager of the firm. 3.
Time period is static. 4. There is existence of imperfectly competitive market. 5. A firm acts rationally, i.e. it
always attempts to maximize profit by investing limited investment budget.

Two approaches of Profit maximization Model:

A. TR-TC Approach: o According to this approach profit will be maximized when the gap between TR and
TC will be maximum. o Graphically, when the vertical distance between TR curve and TC curve is maximum,
Profit will be maximum. o In perfect competition market TR curve is positively sloped straight line starting
from origin and in Imperfect Compeition market/monopoly TR curve starts from origin, increases at
increasing rate at first, increases at decreasing rate, reaches to maximum point and finally decreases. TC curve
is Inverse ‘S’ Shaped starting from any point of Y-axis from where TFC starts.

Graphically, TR TC Output TR,TC,π O Q1 Q2 Q3 R C π π H Profit Maximization in Perfect Competition

Market Profitable range of output A B, Graphically, TR TC Output TR,TC,π O Q1 Q2 Q3 R C π π H Profit
Maximization in Imperfect Competition Market Profitable range of output A B

[Link]-MC Approach: o It is another alternative approach to explain profit maximization objective of firms. o
Marginal Revenue(MR) refers to the additional revenue received by the firm by selling one extra unit of
output. o Marginal Cost (MC) refers to the additional cost incurred in producing one additional unit of output.

There are two conditions to be satisfied for firms equilibrium under this approach, which are: 1.
Necessary/First order condition: MR=MC 2. Sufficient /Second Order condition: Slope of MC>Slope of MR
or MC curve must Intersect MR curve from below.

5
Graphically, O Output R/C/π Q E P F MC AR MR AC C G Profit 28 KAMAL REGMI, SHANKER DEV
CAMPUS KATHMANDU
29. 29. 29 Mathematically, MCMR MCMR dQ TCd dQ TRd dQ TCTRd ei dQ d COF TCTR   
    0 0 )()( 0 )( ..,0 ,..   We Know that, For Maximization of Profit, 0 )()( , 0)(, 0, ... 2 2  
 dQ MCd dQ MRd or MCMR dQ d or dQ d or COS  Or, Slope of MR-Slope of MC<0 Or, Slope of MR <
Slope of MC 29KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU
30. 30. Criticisms of Profit Maximization Model: 1. The model is based on unrealistic assumptions like
single entrepreneur, production of single commodity, etc. 2. Marginalism is very complex concept to
determine profit maximizing objective. 3. The firm doesn't have only one objective. Modern firm are multi-
goal firms. 4. The theory believes in "survival of the fittest" which is not applicable in production. 5. The
structure of modern corporate business, i.e. separation of ownership and management may divert managers'
interest from maximizing profit to maximizing their own welfare and so on. 6. Policies that tend to maximize
profits cause increased risk and instability, which managers fear. Therefore, risk averse managers avoid a
policy of profit maximization. 30KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU
31. 31. Case 3 o Tamakoshi Electronics Ltd. has following demand and cost functions, P = 2000 - 10Q
and C = 1000 + 200Q Calculate, i) Price (P), ii) Output (Q), iii) Total revenue (TR), and iv) profit (π) under
the objective of profit maximization. 31KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU
32. 32. Case 4 o A firm has the demand function Q=30-P . Total fixed cost of the firm is Rs 20 and
variable cost per unit of output is Rs 4. Then find profit maximizing level of output price and total profit of
the firm. 32KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU
33. 33. VALUE MAXIMIZATION MODEL o Long-run objective of the firm guided by another objective
of profit maximization. o Designed to solve the weaknesses of short-run profit maximization objective. o
Solomon and Pringle, "When the time period is short and uncertainty is not much, profit maximization &
value maximization are same." oL. J. Gitman, "Since share price represents the owner's wealth in the firm,
share price maximization is consistent with owners wealth maximization." oIn case of organization, value of
firm refers to the shareholders wealth which is measured by the share price of the stock. oValue maximization
model is also expressed as wealth maximization model. 33KAMAL REGMI, SHANKER DEV CAMPUS
KATHMANDU
34. 34. Contd… o Value can be defined as the present value of the firm's expected future net cash flows. o
Value can be defined as the present value of the firm's expected future net cash flows. o Value of the firm =
Present value of expected future profits (P.V.) Where, P.V.  present value of expected future profits 1,
2 . . . n  mean profit of each year r  rate of discount or rate of interest 34KAMAL REGMI, SHANKER
DEV CAMPUS KATHMANDU
35. 35. Contd… o Since, profit is the difference between total revenue and total cost. Hence, the eqn. (i)
can be written as Features of value maximization model: (1) This model creates direct relationship between
profit and managers remuneration (2) This model is more useful in competitive markets (3) It provides simple
explanation and easy to make managerial decision (4) It deals with both cost and benefit of the firm in long-
run (5) It also deals with social contribution and benefits. 35KAMAL REGMI, SHANKER DEV CAMPUS
KATHMANDU
36. 36. Superiority of Value maximization model: Value maximization model is superior than profit
maximization model in following respects: o Profit maximization model deals with short-term profit
maximizing business projects. Value maximization model deals with long-run profit maximizing business
projects and this model incorporates all these activities including risk analysis. oProfit maximization model is
6
static model. It is because this model deals the objective of a firm on the basis of single time period. But,
value maximization model is dynamic model. It is because this model explains the objective of a firm with
future risk and uncertainty on the basis of multi-period. oProfit maximization model is focused on sole-trading
business at which welfare maximization of single owner is preferred. Value maximization model is focused
on corporate business at which welfare maximization of many shareholders is preferred. 36KAMAL REGMI,
SHANKER DEV CAMPUS KATHMANDU
37. 37. BAUMOL'S THEORY OF SALES REVENUE MAXIMIZATION o W.J. Baumol criticized the
profit maximization model developed sales-revenue maximization model through the publications of an
article "Business Behavior, Value and Growth in 1956.” o ultimate objective of the firm is to maximize sales
rather than profit. o Sales refers to the revenue of the firm therefore he named his hypothesis as sales
maximization hypothesis or revenue maximization hypothesis. osales maximization means maximizing TR
from sales. oalso supported the view of profit maximization by saying that firms need minimum profit to
spend on expansion plans, make dividend to attract stock buyers in future spend to increase long-term sales
and to provide better return to the shareholders. 37KAMAL REGMI, SHANKER DEV CAMPUS
KATHMANDU
38. 38. Assumptions: (1) The time horizon of a firm in a single period. (2) During this period the firm
attempts to maximize its total revenue subject to a profit constraint not the physical volume of output. (3) The
firm must realize a minimum level of profit to keep shareholders happy and avoid a fall of share prices. (4)
Cost curves are U-shaped and demand curves are downward sloping. (5) Market is imperfectly competitive.
38KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU
39. 39. Business managers pursue the goal of sales maximization rather than profit maximization for the
following reasons: • Financial institutions consider sales as an index of performance of the firm and are
willing to finance the firm with growing sales. • Salaries and slack earnings of the top managers are linked
more closely to sales than to profit. • Sales growing more than proportionately to market expansion indicate
growing market share and a greater competitive strength and bargaining power of a firm. • Sustained growing
sales at large scale gives prestige to the managers, while large profit go into the pockets of shareholders. •
Business stability is the pre-condition for sustained growth of business. Managers thus prefer a steady
performance with 'satisfactory' profits to spectacular profit maximization projects. • Firms can easily handle
personnel problems when they have large sales. These firms can have the capacity to make higher payments
with some managerial emoluments to their employees. 39KAMAL REGMI, SHANKER DEV CAMPUS
KATHMANDU
40. 40. Two cases under sales revenue maximization: 1. Sales revenue maximization without profit
constraint: ◦ When firm sets its goal of sales maximization without profit constraint, it produces the level of
output at which TR is maximum with unitary price elasticity of demand, e = 1. 2. Sales revenue maximization
with profit constraint: o If the Board of Director directed the managers to meet profit target, firm produces the
level of output where TR is increasing with positive MR and price elasticity of demand, e > 1. 40KAMAL
REGMI, SHANKER DEV CAMPUS KATHMANDU
41. 41. Graphically, 41KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU
42. 42. Conclusions of Baumol’s Theory: o Sales maximizer produces more output than profit maximizer
o Sales maximizer determines low price of the product in comparison to profit maximizer. o Sales maximizer
obtains low profit in comparison to profit maximizer. oSales maximization hypothesis has a better predictive
performance than the traditional profit maximization objective hypothesis. 42KAMAL REGMI, SHANKER
DEV CAMPUS KATHMANDU
7
43. 43. Criticisms of Sales-Revenue Maximization Model (1) It is consistent with profit maximization in
long-run. (2) The firms can sell more than profit maximizing level only due to the ignorance of their demand
curve. (3) According to J. R. Witdsmith, Boumol's model has unacceptable conclusion. (4) According to W.G.
Shepherd, in case of oligopoly, the equilibrium lies at the point of kink, under kinked demand curve.
Therefore, in such a situation profit maximization and sales maximization do not become competitive. (5) It
cannot be tested without knowing demand and cost functions of individual firm. (6) It doesn't show the
process of equilibrium of the industry consisting of all firms as sales maximizer is attained. KAMAL REGMI,
SHANKER DEV CAMPUS KATHMANDU 43
44. 44. Case 6 Given the total demand function and total cost function P = 20 – Q TC = 50 + 4Q
Determine-the price (P), output (Q), total revenue (TR) and profit () under: (a) Profit maximization model
(b) Sales revenue maximization model (c) Sales revenue maximization model with profit constraint of Rs 13.
KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU 44
45. 45. Case 7 o let, demand function, P = 20- 0.2Q, cost function, C= 140 + 4Q a) Determine output,
price and TR that maximize profit. b) Determine output, price and Profit that maximizes sales. c) Determine
output, price and TR under profit constraint of Rs. 170. KAMAL REGMI, SHANKER DEV CAMPUS
KATHMANDU 45
46. 46. Case 8 o A manufacturing company is operating in Kathmandu valley with the demand function
given as P = 10 ˗ 0.1Q, and the total cost function as C = 70 + 2Q. If the company wanted to maximize profit,
what is the price output combination and the total profit and revenue? The management of the company
realizes the need for capturing market. Therefore, it started to promote its product with the strategy of sales
revenue maximization instead of profit maximization. What will be the price output combination and total
profit under the condition of sales revenue maximization? The shareholders of the company did not like
market share capture strategy (sales revenue maximization) followed by the management. The shareholders
showed strong dissatisfaction against the management in its Annual General Meeting. They argued that
management should not be given opportunities for free play in the company. The shareholders' meeting
consensually decided to put restriction with minimum profit of Rs 10. Under this condition, what is the
optimum Price (P), output (Q) combination and total revenue? [TU 2016] KAMAL REGMI, SHANKER
DEV CAMPUS KATHMANDU 46
47. 47. WILLIAMSON'S MODEL OF MANAGERIAL DISCRETION: o Oliver E. Williamson
developed a full-fledged theory of firm related to managerial discretion and he believed that the managers
look at their self interest while making decisions of firm. o Managers have discretion in pursuing policies
which maximize their own utility rather than attempting the maximization of profits which maximizes the
utility of the owner- shareholders. o Profit acts as a constraint to the manager's utility maximization behavior
because the financial market and the shareholders expect maximum profit. o The objective of a firm is to
maximize their own utility function with profit constraint. o The job security of managers endangers, if
managers fails to earn a minimum profit to pay in the form of dividends to the owners. KAMAL REGMI,
SHANKER DEV CAMPUS KATHMANDU 47
48. 48. Contd… o Manager’s utility function can be written as, U = f(S, M, ID) Where, U = manager's
utility S = staff expenditure M = managerial emoluments ID = discretionary investment KAMAL REGMI,
SHANKER DEV CAMPUS KATHMANDU 48
49. 49. Contd… Simplified Model: The model can be expressed as: Maximize (U) = f(S, M, ID) Subject
to πR > π0 + T where, ◦ πR is the reported profit (reported to tax office) which is the difference between
actual profit (p) and managerial emolument i.e. πR = π - M, and, ◦ π0 is the minimum profit satisfy the
8
shareholders The actual profit is the current profit of firm which is the difference between total revenue (R)
and Total cost (C) including staff expenditure i.e. π = R - C – S KAMAL REGMI, SHANKER DEV
CAMPUS KATHMANDU 49
50. 50. Contd… When managerial emolument M =0, the model can be expressed as: Maximize (U) = f(S,
πD) Subject to π> π0 + T We know, Discretionary profit πD= π - π0 - T, Also, Discretionary investment ID =
π R - π 0 - T or, ID = (π - M) - π 0 - T (... π R = π - M) when M = 0 or, ID = (π - 0) - π 0 - T or, ID = π - π 0 -
T or, ID = π D KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU 50
51. 51. Manager's utility curve Collection of indifference curves U1, U2, U3 is the manager's utility curve
and shows the preference of manager. Higher indifference curve gives higher utility to manager. KAMAL
REGMI, SHANKER DEV CAMPUS KATHMANDU 51
52. 52. Relation between discretionary profit and staff expenditure KAMAL REGMI, SHANKER DEV
CAMPUS KATHMANDU 52 Discretionary Profit Curve Point E is the equilibrium where discretionary curve
is tangent to the manager's utility curve U2. Hence, Se is the staff expenditure and De is the discretionary
profit. In profit maximization goal of firm's staff expenditure would be S and maximum profit would be
DM. This implies that manager prefers more amount of staff expenditure as compared to profit maximizing
situation i.e. Se > S.
53. 53. Comparison of Profit maximization, revenue maximization and managerial discretion models: o
Williamson’s model is based on the implicit assumption "other things remaining the same". o This model is
valid only in the market not having strong rivalry. o If the market is with strong rivalry, profit maximization is
most appropriate. oWilliamson’s model is practically useful model because this model gives conclusions like
change in discretionary expenditures like staff expenditure, managerial emoluments and, discretionary
investment are the tendencies and the determinants of behavior of a rational manager. oThis model also shows
the effect of taxes on objective of the firms or utility of the managers, therefore, it is practically useful model.
o This model deals about reported profit, whereas sales revenue model and profit maximization model deal
about actual profits. KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU 53

Role of a managerial economist in business

1. 1. Role of a Managerial Economist in business Making decisions and processing information are the
two primary tasks of managers. •In order to make intelligent decisions, managers must be able to obtain,
process and use information. •The purpose of learning economic theory is to help managers know what
information should be obtained and how to process and use the information.
2. 2. • The task of organizing and processing information and then making an intelligent decision based
upon this information and the basic theory can take two general forms: • 1. Task of making specific decisions
by managers • General task of managers to use readily available information to make a decision or carryout a
course of action that Furthers the goals of the organization.
3. 3. • Specific decisions: • there are several decisions that managers might have to take. • Ex: whether or
not to close down a branch of firm that has recently been unprofitable. • Whether or not a store should stay
open more hours a day. • Whether to pay for outside computing or copying services rather than install an in
house computer or copier.
4. 4. • After conducting a survey of British industry Alexander and kemp came to the conclusion that the
managerial economist undertakes the following specific functions: • Production scheduling. • Demand
forecasting. • Market research • Economic analysis of industry. • Investment appraisal, • Security management
analysis
9
5. 5. • Advice on foreign exchange management. • Advice on trade. • Pricing and the related decisions
and analyzing and forecasting environmental factors.
6. 6. • All of these and a myriad of other managerial decisions require the use of the basic economics. •
General tasks : • Economic theory helps decision-makers to know what information is necessary to make an
intelligent decision to fine the correct solution to a problem and to learn how to process and use that
information.
7. 7. • After obtaining the desired information or as much information as is economically feasible to
obtain, the manager must analyze this information and use it in correspondence with the theoretical and
statistical tools available to make the best decision possible under the circumstances.
8. 8. • We find that business is influence by two sets of decision factors: • External factors • Internal
factors. • External factors: • the most important external factor is • The general economic condition of the
economy, such as the level and rate of growth of national income, regional income distribution, influence of
international factors on the domestic economy, the business cycle etc.
9. 9. • The managerial economist must obtain and process information with regard to these changes,
advise the management regarding their likely effects on the operations of the firm and suggest possible ways
to further the organization’s goals. • The second important external factor for a firm is the prospects of
demand for the product.
10. 10. • Thirdly the managerial economist also tries to find out if there is anything which is influencing
the input cost of the firm. • Fourthly the market conditions of raw material and finished product is also a
subject of study by the managerial economist. • Next managerial economist can also help in the expansion of
the firm’s share in the market.
11. 11. • Lastly managerial economist has also to keep in touch with the government’s economic policies
and the central bank’s monetary policies, annual budgets of the government, etc.
12. 12. Internal factors: • The role of managerial economist in internal management is: • He helps in
deciding about the production, sales and inventory schedules of the firm. • He not only provides information
regarding their present level but also forecasts their future trend.
13. 13. • A managerial economist is used best to provide the pricing and profit policies. • The firm also
needs the help of managerial economist for its investment decisions. • For this he need to forecast the return
on the investment and the cost that the firm incurs by taking up the investment.

DECISION MAKING IN MANAGERIAL ECONOMICS

1. 1. Outline What is managerial economics and why should you study it? Examples of managerial
decisions Six steps to decision making How does managerial economics helps in decision making? ?
2. 2. Managerial economics is the application of economic theory to management decision making What
is managerial economics? Economics Management Managerial economics
3. 3. Why Managerial Economics ? Managerial economics is the study of how managers can apply
economic principles and analyses as well as quantitative tools in making an effective business and managerial
decisions involving the best use (allocation) of the organizations scarce resources to achieve their objectives.
4. 4. Examples of Managerial Decisions • How to use economic theory to set prices that maximize
profits. • How to use economic theory to choose the cost- minimizing production technique for a given scale
of output. • How to use economic theory to select the “optimal” location for a new restaurant, grocery store,
etc. • How to use economic theory to forecast near-term demand for goods and services.

10
5. 5. ROLE OF MANAGERIAL ECONOMICS IN MANAGERIAL DECISION MAKING Managerial
economics uses economic concepts and decision science techniques to solve managerial problems.
Management Decision Problems Managerial Economics Optimal Solutions to Managerial Decision Problems
Economic Concepts Decision Sciences
6. 6. • Framework for Decisions • Theory of Consumer Behaviour • Theory of the Firm • Theory of
Market Structure and Pricing Economic Concepts Management Decision Problems Product Price and Output •
Make or Buy • Production Technique • Internet Strategy • Advertising Media and Intensity • Investment and
Financing
7. 7. Decision Sciences Tools and Techniques of Analysis • Numerical Analysis • Statistical Analysis •
Forecasting • Game Theory • Optimization Managerial Economics Use of Economic Concepts and Decision
Science Methodology to Solve Managerial Decision Problems
8. 8. Six Steps to Decision Making 1. Defining the Problem 2. Determining the Objective 3. Exploring
the Alternatives 4. Predicting the consequences 5. Making a choice 6. Performing sensitivity analysis
9. 9. Defining the problem “I have a flat tire.”
10. 10. Defining the objective The spare won’t last long I gotta get this tire replaced!
11. 11. Exploring the alternatives • Go to Sears • Go to Wal-Mart
12. 12. Predicting the consequences • Wal-Mart is closer and cheaper. • Sears is a costlier and poor in
facilities.
13. 13. Making a choice I’m going to Wal-Mart
14. 14. Sensitivity Analysis: Why is it Useful? Sensitivity analysis provides an insight into the key
features of a problem that affect a decision— •e.g., the decision to continue a product line depends of profit
forecasts, which in turn are based on assumptions about future sales, prices, or costs. What happens to our
forecast when we modify the assumptions? •It allows us to trace the effects of changes about which the
manager may be uncertain. •It can give solutions to decisions which are recurring, but must be made under
slightly different conditions.
15. 15. How does managerial economics helps in decision making? Following are the steps helps to
managers while taking decisions.. [Link] objectives. [Link] the problem. [Link] factors that affect
the problem. [Link] alternative solutions. [Link] data and other information's. [Link] and screen
alternatives. [Link] best alternative and monitor result.
16. 16. 1. “Kolaveri D” • Tamil Actor Dhanush recorded a song for the film 3, in which he also plays the
lead role - only to discover soon after that a disgruntled employee in his office had leaked it on YouTube. •
"Then someone suggested making a video of the song and releasing that as well on YouTube as the official
version,“. • As if by magic, the song became a rage, effortlessly transcending language barriers - the first
Tamil song, albeit with a smattering of English, to do so.
17. 17. 2. VOLVO CHANGE STRATEGY Volvo brought in its inter-city bus when it saw the market was
not ready for a city bus SELL THE CONCEPT, NOT JUST THE PRODUCT Volvo engaged with all
stakeholders - from operators to passengers to drivers - to sell its buses USE MACRO CHANGES TO YOUR
ADVANTAGE When Volvo saw that increasing congestion and growing environmental awareness were
making public transport attractive, it brought back the city bus CHANGE THE GAME When the competition
started to close in on Volvo, it introduced products that would increase the number of passengers
18. 18. 3. GODREJ APPLIANCES THE PROBLEM Despite the strong brand name, people were turning
away from the company's products. THE CHALLENGE The market had turned competitive and Godrej could
not connect with young buyers. THE WAY OUT Introduce better technology, more products, re-brand
11
products to appeal to the youth. THE SUCCESS Success Acquired a youthful tech image, recaptured
significant market share in refrigerators.

12