MANAGERIAL ECONOMICS

1st Semester AY 2018

 Some Terminologies
business - any situation where there is a
transaction between two or more parties.
manager - A person who directs resources to
achieve a stated goal.
economics - The science of making decisions in
the presence of scarce resources.
microeconomics - Study of behavior of
individual economic agents
model - in general terms is a representation of
a system, which is simplified in order to
illustrate the important features and
relationships involved.
Managerial Economics
definition
managerial economics - The study of how
to direct scarce resources in the way that
most efficiently achieves a managerial
goal. (Michael R. Baye)
Managerial Economics
definition
To quote Mansfield, “Managerial economics
is concerned with the application of
economic concepts and economic analysis
to the problems of formulating rational
managerial decisions.
Managerial Economics
definition
Spencer and Siegelman have defined the
subject as “the integration of economic
theory with business practice for the
purpose of facilitating decision making and
forward planning by management.”
Managerial Economics
definition
Managerial economics is about the
application of economic theory and
methods to business decision-making. (Nick
Wilkinson)
Managerial Economics &
Microeconomics
Generally, managerial economics applies
microeconomic theory to business
problems
Microeconomics studies the actions of
individual consumers and firms; managerial
economics is an applied specialty of this
branch
How to use economic analysis to make
decisions to achieve firm’s goal of profit
maximization
Microeconomics is the study of how
individual firms or consumers do and/or
should make economic decisions taking
into account such things as:
1. Their goals, incentives, objectives.
2. Their choices, alternatives, problems.
3. Constraints such as inputs, resources,
money, time, technology, competition,
supply & demand factors.
4. All (cash & noncash) incremental or
marginal benefits and costs.
5. The time value of money.
Difference between the emphasis of
microeconomics and that of
managerial economics
 Microeconomics tends to be descriptive, explaining how
markets work and what firms do in practice, while the
managerial economics is often prescriptive, stating what
firms should do, in order to reach certain objectives.
 At this point it is necessary to make another very
important distinction: that between positive and
normative economics. This is sometimes referred to as
the ‘is/ought’ distinction, but this is actually somewhat
misleading.
 Essentially positive statements are factual statements
whose truth or falsehood can be verified by empirical
study or logic. Normative statements involve a value
judgement and cannot be verified by empirical study or
logic.
Approaches to the study of
economics
Positive Economics
The study of what is -
of how the economy actually works

Normative Economics
The study of what should be; it is used
to make value judgments, identify
problems, and prescribe solutions
Nature and Scope of
Managerial Economics
The most important function in managerial
economics is decision making.
It involves the complete course of selecting
the most suitable action from two or more
alternatives.
The primary function is to make the most
profitable use of resources which are
limited such as labor, capital, land etc.
Nature and Scope of
Managerial Economics
A manager should be very careful in taking
decisions as the future is uncertain; he
ensures that the best possible plans are
made in the most effective manner to
achieve the desired objective which is profit
maximization.
Issues addressed by managerial
economics
..\Case Study\CS 1 Global Warming.docx
Relationship with economic
theory
The main branch of economic theory with which
managerial economics is related is
microeconomics, which deals essentially with how
markets work and interactions between the
various components of the economy. In particular,
the following aspects of microeconomic theory are
relevant:
theory of the firm
theory of consumer behaviour (demand)
production and cost theory (supply)
price theory
market structure and competition theory
Relationship with decision
sciences
The decision sciences provide the tools and
techniques of analysis used in managerial
economics. The most important aspects are
as follows:
numerical and algebraic analysis
optimization
statistical estimation and forecasting
analysis of risk and uncertainty
discounting and time-value-of-money
techniques
Relationship with business
functions
All firms consist of organizations that are
divided structurally into different
departments or units, even if this is not
necessarily performed on a formal basis.
Typically the units involved are:
production and operations
marketing
finance and accounting
human resources
Elements of managerial
economics
BUSINESS FIRMS AND BUSINESS
DECISIONS
Business firms are a combination of
manpower, financial, and physical
resources which help in making managerial
decisions. Societies can be classified into
two main categories - production and
consumption. Firms are the economic
entities and are on the production side,
whereas consumers are on the
consumption side.
BUSINESS FIRMS AND BUSINESS
DECISIONS
The performances of firms get analyzed in
the framework of an economic model.
The economic model of a firm is called the
theory of the firm. Business decisions
include many vital decisions like whether a
firm should undertake research and
development program, should a company
launch a new product, etc.
BUSINESS FIRMS AND BUSINESS
DECISIONS
Business decisions made by the managers
are very important for the success and
failure of a firm.
The impact of goods production, marketing,
and technological changes highly
contribute to the complexity of the
business environment.
Managerial
Economics
Is a Tool for
Improving
Management
Decision Making
Figure 1.1
Steps for Decision Making
Define the Problem
Determine the Objective
Discover the Alternatives
Forecast the Consequences
Make a Choice
Scientific theories
A scientific theory does two things:
1. it describes or explains relationships
between phenomena that we observe, and
2. it makes testable predictions.
Theories are indispensable to any science, and
over time they tend to be gradually improved,
meaning that they fit existing observations
better and make more accurate forecasts.
When a theory is initially developed it is
usually on the basis of casual observation, and
is sometimes called a hypothesis.
Scientific theories
This then needs to be tested and in order to
do this an empirical study is required. An
empirical study is one which involves real-
world observations. Such studies can be either
experimental or observational: the former
involve a situation where the investigator can
control the relevant variables to isolate the
variables under investigation and keep other
factors constant. This is often done in
laboratory conditions, for example in testing
the effect of heat on the expansion of a metal.
Scientific theories
In business and economic situations this is usually
not possible, so an observational study must be
performed. An investigator may for example be
interested in the effect of charging different prices
on the sales of a product. However, it may be
difficult to isolate the effect of price from the
effects of promotion, competitive factors, tastes,
weather and so on, which also are affecting sales.
The analysis of the data in the study involves
statistical techniques, such as regression analysis,
and then inferences are drawn from this regarding
the initial theory, in terms of its acceptance or
rejection. The whole process of testing economic
theories is often referred to as econometrics.
Scientific theories
It is obviously of vital importance to managers to have
good theories on which to base their decision-making. A
‘good’ theory has the following characteristics:
1 It explains existing observations well. (specific)
2 It makes accurate forecasts. (accurate)
3 It involves mensuration, meaning that the variables
involved can be measured reliably and accurately.
(measureable)
4 It has general application, meaning that it can be
applied in a large number of different situations, not just
a very limited number of cases. (general application)
5 It has elegance, meaning that the theory rests on a
minimum number of assumptions. (minimum
assumptions)
Scientific theories
Group Task 1
Read and understand the case study on
Equal prize money in tennis and answer the
questions