Nature and Scope of Managerial

Economics

Dr. GOPALAKRISHNA B.V.

Faculty in MBA,
SDM, Mangalore
 Meaning and nature of Managerial Economics
 Managerial economics became a very popular subject
after the publication of the text book “Managerial
Economics”, by Joel Dean in 1951.
 Managerial economics is an interesting and
fundamental part of the business education.
 Modern business has become very competitive and
complex.
 Managerial Economics generally refers to the
integration of economic theory with business
practices.
 While economics provides the tools and techniques
such as demand, supply, price, competition etc.
 Managerial economics applies these tools to the
management of business.
 Economics is an social sciences is concerned
with allocation of scarce resources to
alternative uses.
 Robins quotes that “Economics is a science
which studies human behavior as a
relationship between means and ends which
have alternative uses.
 Economics is the study of evaluation of
economic problems. Each and every economic
problem is a problem of choice and valuation.
 The problem of choice arises – due to
relationship between means and ends
 The relationship between means (wants)
and ends (resources) creates economic
activities in the country.
 The purpose of economic activities is to
satisfy maximum possible wants with
minimum possible resources.
 Human wants are two types –
1. Human wants are unlimited
2. Human wants can be graded – more urgent
and less urgent
 Resources – money and materials – two
types –
1. Resources are limited in supply
2. Resources have alternative uses
 Economics

Economic Problems

Means (Human Wants) Ends (Resources)

Unlimited Graded Limited Alternative

Wants Wants Resource Uses

Scarcity of Resources
Meaning and Definition of Managerial Economics …….
Decision Making
 Managerial Economics
Forward Planning

 Decision making and forward planning are the

two important functions of every management.

 Decision making is the process of selecting one

course of action from three or four alternative
courses of action.

 Forward Planning means establishing plans for

the future (planning for the future).
Definitions of Managerial Economics

Joel Dean – “Managerial Economics is the use of economic

analysis in the formulation of business policies”

Mansfield – Managerial Economics is concerned with the

application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions.

Mcnair and Meriam – Managerial Economics consists of the

use of economic modes of thought to analyse business situation.

M.H. Spencer and L. Siegelman – Managerial Economics as

the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by
management.
 Haynes, Mote and Paul define those aspects of
economic and its tools of analysis which are most relevant
to the firms decision making process…..
 Thus, it is clear explains managerial economics is
nothing but the application of economic principles
by management in decision making and forward
planning.

 Managerial economics is the integration of

economic theory with business practice and lies on
the borderline of economics and management. It
can be represented as below
Diagrammatically Representation

Business
Economic Management
Theory

Managerial Economics
 Managerial Economics and Economic Theory

 Managerial economics is an applied

economics, it depends entirely on
economic analysis for getting theoretical
knowledge for decision-making.
 It bridges the gulf between pure
economics and management practice.
 The important subject of study of
managerial economics – demand, supply,
cost of production, pricing of products in
different market structure.
 The study of economics is divided by
modern economists into two parts –
micro and macro economics.
The term micro economics and macro
economics were first used by Swedish
Economist – Ragnar Frish in 1933.
Micro economics is the study of the
economic actions of individual and small
groups of individual.
For example single households, individual
prices, wages, income, individual industry,
single commodity etc.
Macro economics on the other hand, studies
of aggregates – the economy as a whole –
total employment, unemployment, national
income, total consumption etc.
 Characterstics of Managerial Economics
 Managerial economics is Micro
Economics in character. It studies the
problems of a business firm and does not
deal with the entire economy.
 Managerial economics uses economic
concepts and principles which is known as
theory of the firm.
 Managerial economics makes use of
macro economics, because macro
economics provides an intelligent
understanding of the external environment
of the business.
 Managerial economics differs from
general economics in several respects.
 Characteristics of Managerial
Economics……
 Managerial economics, being the study
of the allocation of the resources
available to a firm.
 Managerial economics are based
mainly on the theory of firm. It is
only for the analysis of profits that
help is taken of the theory of
distribution.
 Differences between Managerial Economics and
Economic Theory
Managerial Economics
1. Managerial economics
applies principles to the
problems of a firm.
2. Managerial economics is
micro Economics in
character.
3. Managerial economics,
though micro in character
deals only with the firm. It
means that it has nothing to
do with the individual’s
economic problems.
4. Managerial economics
makes use of the theory of
profit only.
5. Managerial economics is
realistic in nature
Economic Theory
1. But economics deals with
economic theory and
principles
2. on the other hand is both micro
and macro in its nature.
3. Economics deals with the
economic problems not only of a
firm, but also of an individual.
4. Economics deals with all the theories
of distribution, namely rent, wages,
interest, profits.
5. The scope of economic theory is wider
than that of managerial economics.
Scope of Managerial Economics
1. Demand Analysis and Forecasting
2. Cost and Production Analyses
3. Pricing Practices and Policies
4. Profit Management
5. Capital Management
6. Linear Programming and the Theory
of Games
 Scope of Managerial Economics……
1. Demand Analysis and Forecasting

 An accurate estimation of demand is a major

part of business decision-making.
 Traditional demand theory explains the
consumer’s behaviour, it is very useful in
demand estimations.
 A number of factors influence the demand such
factors are called demand determinants.
 Demand forecasting relates to the study of
demand determinants, demand distinctions and
demand forecasting.
 Demand analysis and forecasting occupies a
strategic place in managerial Economics.
 2. Cost and Production Analysis

 Cost estimates are most useful for

management decision-making.
 Accurate cost, sound pricing practices and
production analysis is necessary for profit
maximization – firm.
 Cost and production analysis are inter-
connected. But cost analysis is wider in
scope than production analysis.
 3. Pricing Practices and Policies
 Most important area of managerial
economics is pricing.
 Accurate determination of price decides
the future of a firm.
 Since firms work for profits, pricing
decisions are to be taken with sufficient
vigil.
 The various aspects that are dealt under it
cover the price determination in various
market forms, pricing policies, pricing
methods, differential pricing productive
pricing and price forecasting.
 4. Profit Management
 The chief purpose of a business firm is to earn
the maximum profit.
 There is always an element of uncertainty
about profits be a use of variation in costs and
revenues.
 If knowledge about future were perfect, profit
analysis would have been very easy task.
 Hence profit planning and its measurement
constitute the most difficult area of managerial
Economics.
 Various inter and external factors cause
variations in cost and revenues of the firm.
 Fluctuations in demand, wide changes in prices of
inputs and products, changes in the number of
competitions and degreee of competition,
changes in technology and methods of production
changes in government policies etc.
 Break-Even Point analysis and alternative
profit policies – studies.
 5. Capital Management

 Capital management means planning and control of

capital expenditure.
 Capital is a scarce and dear factor. The success of a
business depends upon successful capital
management.
 Since the business is full of risks and uncertainties
capital investment needs atmost care.
 Issues related to the firm’s capital investments are
most complex and troublesome.
 Accurate calculation of the profitability of capital
investment, choice of capital investments and
optimal allocation of capital are the three problems
of capital management.
6. Linear Programming and the Theory of
Games
 In recent years, the subject ‘Operations
Research’ has become very popular in the
management education.
 Linear programming and the theory of
games are the important techniques of
operations research.
 These two are the mathematical
techniques very widely used in managerial
economics.
 Therefore, these two have become the
part of the study of managerial economics.
Factors influence on Business Decision-
making
 Decision-making is an integral part of the modern
business management.
 The success and failure of firm depends on decision
making of a manager.
 Decision-making implies selection of one action from
out of two or more alternative courses of action.
 The limited amount of resources is one type of
constraint faced by the manager of a firm.
 The phase of business Cycles, the competition from
the rival firms, government’s fiscal and monetary
policies and export and import policies etc.
Important area of business decision-
making of business managers are -

1. Price and output decision

2. Demand estimation decision
3. Choice of production technique
decision
4. Advertising decision
5. Investment decision
 1. Price and output decision
 Price determination is an important decision
making of business manager.
 Price of a product will determine - how much
quantity of its product it will be able to sell.
 Price and cost per unit of output will
determine its profit.
 Demand estimation determines success and
failure of firms.
 Price-output decisions are also depends on
nature of market structure & degree of
competition.
2. Demand estimation decision
 Demand estimation is a crucial factor to achieving
maximum profit.
 It is also depends on consumer behavior, tastes,
preferences, habits and level of growth of GNP.
 Manager of business firm have not only to estimate current
demand for the product but also for the future.
3. Choice of production technique decision
 Choice of production decision depends upon availability of factors of
production and relative prices
 Production techniques involves the combination of labour and
capital.
 Labour intensive technology requires more of labour and less of
capital. While, capital intensive technology uses more of capital and
less of labour
4. Advertising decision
 Advertising expenditure plays an important role

in the monopolistic competition and

oligopoly market.
 Advertisement is required to promote sales of a

product.
 Advertisement tries to influence the consumers

about quality/features of its products.

 Advertisement undertakes with the help of
newspaper, television, radio, cable TV etc.
5. Investment Decision (investment expenditure)
 It relates how much of investment is to be

undertaken in a particular period.

 How much returns/reward obtained from
particular machinery.
 Investment decision characterised by risk and

uncertainty.