Managerial Economics and

Decision Making

MBA 1st Semester

Purbanchal University

Lecture BY:
Kamal Regmi
 Units Included:
• Unit I : Introduction to Managerial Economics
• Unit II: The Theory of Consumer Behavior
• Unit III: Demand and Supply: Theory and Analysis
• Unit IV: Costs and Revenue: Theory and Analysis
• Unit V:Production Theory and Analysis
• Unit VI: Working of firms and Industry : Markets

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 References:
• Salavatore D, “Managerial Economics in a global Economy”-
4th edition
• Salavatore D, “Microeconomics Theory and Applications”
• Koutsoyiannis A, “Modern Microeconomics”
• Dwevedi D.N. “Microeconomics Theory and Applications”.
• Petersen and Lewis, “Managerial Economics”
• Mankiew, G, “Principles of Microeconomics”
• Adhikari, Poudel and Regmi, “Business Economics” etc.

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 Unit I
Introduction to Managerial Economics

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 Concept of
Manager,
Economics
and
Managerial Economics:

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 Manager
• Manager is an executive whose job is to
organize and control the work of a business or
organization or a part of it.
• Manager is the mobilizer of resources with the
objective of attaining certain objectives of an
organization.
• Works in between resources and Goal.

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 Economics
• Oeko + nomicus – Household Study.
• Adam Smith, “Science of wealth”
• Alfred Marshall, “Study of human being and material
welfare”
• L. Robbins, “Science of Scarcity and Choice”
• P.A.Samuelson, “Science of dynamic growth and
sustainable development”
• Economics is a subject which teaches the managers to
allocate the scarce resource in efficient way.
• Also helps to choose the best one among the various
alternatives.
• Two Branches : Microeconomics and Macroeconomics

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 Managerial Economics:
• Latest branch of economics-Concept of managerial
economics was emerged after 1950’s.
• Dean Joel initiated the thought about separate branch
of economics as managerial economics.
• Practicability of managerial economics in the real world
was proved by ‘Warren E. Buffet’ chairman of Hathaway
Inc.
• He started an investment partnership with $100 in 1956
AD and has gone to accumulate personal net worth
excess of $86.9 billion(August 28 2018,Third Wealthiest person in the
world after Jeff Bezos and Bill gates).
• Buffet’s success is powerful testimony to the practical
usefulness of managerial economics .

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
Contd…
• Managerial economics prescribes rules for
improving managerial decision.
• It tells managers how action should be
undertaken to achieve organizational goals
efficiently.
• Managerial economics also helps managers to
recognize how economic forces affect
organizations and describes the economic
consequences of management behavior.

Lecture By: Kamal Regmi, Kathmandu Don Bosco College, Lazimpat, Kathmandu
 Managerial economics answers the questions like:

• When are the characteristics of a market so

attractive that entry becomes appealing?
• When in the exit preferable to continued
operation?
• Why do some professionals pay well, whereas
some others offer less?
 Main Concern of Managerial Economics:
(O3)
• O - Opening of firms/ Industries
• O - Operation of firms/ Industries
• O - Out (exit ) of firms/Industries from the
market.

• Managerial economics believes that

successful managers make good decisions and
the most useful tool is the methodology of
managerial economics.
 Features/Characteristics of
Managerial Economics:
1. Microeconomic in Character
2. Pragmatic
3. Normative
4. Conceptual and Tactical
5. Theory of Firm
6. Goal-oriented
7. Coordination between Theory and Practice
8. Wise Choices
9. Multidisciplinary
10. Help of Macroeconomics
Use of Managerial Economics in Managerial Decision Making Process :
Managerial Decision Making Problems:
-Product price and output
- demand or buy
-Production Technique
-Strategy Formulation
-Advertising, investment etc.

Traditional Economics Decision Making Sciences:

-Theory of firm -Mathematical economics
-Theory of demand and supply -Econometrics
-Theory of consumer behavior -Statistical analysis
-Theory of market -Game theory
-Theory of pricing etc. -Optimization etc.

Managerial Economics :
Use of economic concepts and decision sciences to solve managerial decision making problems.

Optimal Solution to the managerial Decision Making Problems.

 Scope of Managerial Economics:
• Operational Issues:
– Theory of demand and supply.
– Theory of production.
– Theory of product and factor pricing.
– Theory of optimization.
– Theory of profit.
– Theory of investment etc.
• Environmental Issues:
– Nature and trend of domestic business environment
– Nature and trend of international business
environment
– Nature and impact of social costs and government
policy measures
 Importance of Managerial Economics
in Managerial 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.
Understand the nature and trend of domestic
and international business environment etc.
 Objective of firms:
• Each and every business firms are established
to attain certain goal or Objective.
• Objective of public company may differ with
that of private company.
• The main objectives of firms are Profit
maximization, value/wealth maximization,
Sales/revenue maximization, maximization of
satisfaction of stakeholders etc.
 Profit Maximization:
• Classical Objective – Supported by classical and
neoclassical economists.
• According to this objective- “The main objective
of business 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.
 Contd…
• Profit is the difference between Total Revenue
(TR) and Total Cost(TC)
i.e. π = TR-TC
• It means profit will be maximized when the
positive difference between TR and TC will be
maximum at a particular level of output.
• There are two approaches to explain profit
maximization model.
 A. TR-TC Approach:
• According to this approach profit will be maximized
when the gap between TR and TC will be maximum.
• Graphically, when the vertical distance between TR
curve and TC curve is maximum, Profit will be
maximum.
• 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, increses 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,
TC

TR, TC, π
TR

R Here,
π OM = ON
RC = HQ2 (Maxm Profit)
A C

H
M
O Output
Q1 Q2 Q3
Profitable range of output
N
π
Profit Maximization in Perfect Competition Market
Graphically,
TC

TR, TC, π B
R
TR
π
Here,
OM = ON
A C RC = HQ2 (Maxm Profit)

H
M
O Output
Q1 Q2 Q3
Profitable range of output
N π

Profit Maximization in Imperfect Competition Market

 B.MR-MC Approach:
• It is another alternative approach to explain profit
maximization objective of firms.
• Marginal Revenue(MR) refers to the additional
revenue received by the firm by selling one extra
unit of output.
• 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.
Graphically,

R/C/π
Here,
TR = OPXOQ = □ OPFQ
TC = OCXOQ = □ OCGQ
π = TR-TC = □ PCGF

F MC
P

AC
Profit
C G

E
AR

O Output
Q

MR
Mathematically,
We Know that,
  TR  TC
For Maximization of Profit,
F .O.C , S .O.C.
d d (TR  TC ) d 2
 0, i.e. 0 or , 2
0
dQ dQ dQ
d (TR) d (TC ) d
 0 or , ( MR  MC )  0
dQ dQ dQ
MR  MC  0 or ,
d ( MR ) d ( MC )
 0
MR  MC dQ dQ
Or, Slope of MR-Slope of MC<0
Or, Slope of MR < Slope of MC
 Numerical Assignments:
• Tamakoshi Electronics Ltd. has following demand and cost
functions, P = 2000 - 10Q and C = 1000 + 200Q
calculate Price(P), Output(Q), Total revenue(TR), and
profit(π) under the objective of profit maximization.
• Surya Carpet ltd has following demand and cost functions:
Q=20-P and C=Q2+8Q+2
find price, quantity and profit under profit maximization
objective.
• Given the demand function Q=200-0.05P and cost function
TC=2000+400Q calculate price, output and profit of profit
maximizer firm.
• 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.
find profit maximizing level of output.
 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.
• Incentive for expansion.
• Incentive for new inventions and innovations.
• Ensures future capital.
• Attracts new investor.
• Increases risk bearing capacity.
• Incentive for Research and Development.
• Main Heart of market economy.
• Indicator of success and achievement etc.
 Numerical Assignments:
• Tejaswini a fashion designer, working as a manager of a boutique for Rsm120000 per
year wants to start her own business by investing her own money of Rs. 400000 on
which she could earn 10% interest if deposited in bank. Her 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 she 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 she could earn only 2% interest on her own money
if deposited in bank?
• 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?
Thank You !