Managerial Economics

Douglas - Managerial economics is ..

the application of economic principles and methodologies to the decision-making process within the firm or organization.

It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics.

Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. It is the application of MicroEconomic principles, and the tools & techniques of decision sciences to examine how an organisation/ a firm can achieve its objective most effectively

Key Concepts: Decision-Making - The primary decision-making role of managerial economics is in determining the optimal course of action where there are constraints imposed on the decision Managerial decisions are subject to legal, moral, contractual, financial, and technological constraints

Economic Decisions of the Firm: What goods and services should be produced (product decision) How should these goods and services be produced (hiring, staffing and capitalbudgeting decision) For whom should these goods and services be produced (market segmentation decision) How price output should be determined (pricing decision)

Scarcity - A condition that exists when resources are limited relative to their demand. In the market process, the extent of this is normally reflected by the price of the resources, goods or services. Resources - Also referred as inputs or factors of production - viz. Land, Labour, Capital, Entrepreneurship usually used in economic analysis.

Profit - A reward to entrepreneurs

for taking risks, being innovative in developing new products, and reducing production costs etc.

Changes in profit give signal to the producers to change the rate of production.

Economic Profit - Revenue less all

relevant costs, both explicit and implicit.

Opportunity Cost - The amount or the subjective value foregone in choosing one activity over the next best alternative.

Circular Flow

The interaction of individuals and firms, in a market economy, can be described as a circular flow of money, goods and services, and also of resources through product and factor markets.
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Functional Relationship - Total, Average and Marginal For any total function (e.g. total product, total revenue etc.) there is an associated marginal function and average function. The key relationships among the total, average and marginal functions are: The value of the average function at any point is the slope of a ray drawn from the origin to the total function. The value of the marginal function at any point is the slope of a line drawn tangent to the total function at that point.

Functional Relationship - Total, Average and Marginal The marginal function will intersect the average function either at a minimum or at a maximum point of the average function If the marginal function is positive, the total function will be increasing. If the marginal function is negative, the total function will be decreasing The total function reaches maximum or the minimum when the marginal function equals zero

 Economic Model - Economic model consists of functional relationship/s, condition/s, or constraint/s on one or more equilibrium conditions Generally, economic models are used to demonstrate an economic principle, to explain an economic phenomenon, or to predict the economic implications of some change affecting one or more of the functional relationships The slope of a function Y= f (X) is the change in Y (i.e. Y) divided by the corresponding change in X (i.e. X) For a function Y= f (X), the derivative, written as dy/dx is the slope of the function at a particular point on the function.

Circular Flow of Economic Activities Firm: Objectives and Constraints Nature and Scope of Managerial Economics

Firms objectives
Profit maximisation Value maximisation Sales (revenue) maximisation with some predetermined profit Size maximisation Long-run survival Management utility maximisation Satisfying

Firms Constraints
Resource constraints Output quantity or/and quality constraints Legal constraints Environmental constraint

Basic Concepts : Economic Problem - Scarcity and Choice Opportunity Cost Profit - Concept and Measurement Economic Profit and Accounting Profit Functional Relationship-Total, Average and Marginal Time Perspective Marginal and Incremental Equi - marginal Economic Model