Subject code : 4AA

Definition of managerial economics

According to Spencer and Siegelman:

 
“The integration of economic theory with business practice for the
purpose of facilitating decision-making and forward planning by
management”.
 
Meaning of managerial economics

Business Economics, also called Managerial Economics, is the

application of economic theory and methodology to business.
Business involves decision-making. Decision making means the
process of selecting one out of two or more alternative courses
of action. The question of choice arises because the basic
resources such as capital, land, labour and management are
limited and can be employed in alternative uses. The decision-
making function thus becomes one of making choice and taking
decisions that will provide the most efficient means of attaining a
desired end, say, profit maximation.
WHO IS THIS?
Father of Modern economics

ADAM SMITH..
DEFINITIONS OF ECONOMICS

ADAM SMITH- Wealth definition

ALFRED MARSHAL- Welfare definition
LIONEL ROBBINS- Scarcity definition

What economic means?

Economics is the study of how people allocate
scarce resources for production, distribution, and
consumption, both individually and collectively.
 Concepts of economics
•Needs
•Wants
•Demands
•Satisfaction
•Efforts etc.,..

Economics is divided into two categories:

•Microeconomics -Microeconomics is the study of individuals

and business decisions, while 
• Macroeconomics.-macroeconomics looks at the decisions of
countries and governments.

Microeconomics involves several key principles

•Demand, Supply and Equilibrium
•Production Theory
•Costs of Production
•Labor Economics
 DISTINCTION BETWEEN MACRO AND MICRO ECONOMICS
1 Deals with Macroeconomics deals with social Microeconomics deals with
and economic status of system as individuals and activities within the
whole. system.

Tracking Macroeconomics tracks the big Microeconomics tracks even the

picture, not just one unit. smallest units and their functioning.
2

Study A business man studies GDP, A business man studies the resources
consumption trends, investment available, costs, employees
3 patterns etc. to judge the market. availability etc to sustain the business.

Target Macroeconomics helps in Microeconomics helps in determining

determining aggregate demand and the current need of demand and
4 supply of target economy. supply chain.

Factor Income is major determination factor Price is major determination factor in

5 in macroeconomics. microeconomics.
Equilibrium Macroeconomics study helps in Microeconomics study helps in
setting equillibrium between income setting equillibrium between
6 and employment in an economy. consumer and firm.

Example International organization studying Small firms tracks microeconomics of

money exchanges tracks their firm operations.
7
macroeconomics factors.
Nature/characterstics of business economics
• Managerial or business economics is a science
• It is an art
• It is macro and micro economics
• It is the economic of the firm
• It is a pragmatic
• It is normative science
• Aims at helping the management
 Scope of managerial economics
subject matter
•Demand analysis and forecasting
•Production function
•Cost analysis
•Inventory management
•Advertising
•Price system
•Resource allocation
•Capital budgeting

Other disciples:
Statistics
Decision- making theory
mathematics
ECONOMIC ANALYSIS
Economic analysis involves assessing or examining topics or issues
from an economist’s perspective. Economic analysis is the study of
economic systems. It may also be a study of a production process or
an industry. The analysis aims to determine how effectively the
economy or something within it is operating. For example, an
economic analysis of a company focuses mainly on how much profit
it is making.

TYPES OF ECONOMIC ANALYSIS

Cost-Benefit Analysis
Cost-Effective Analysis
Cost-Minimization Analysis
1.Cost benefit analysis
Cost-benefit analysis is a way to compare the costs
and benefits of an intervention, where both are
expressed in monetary units.
 Cost effectiveness analysis
Cost-effectiveness analysis is a way to examine both the costs and
health outcomes of one or more interventions. It compares an
intervention to another intervention by estimating how much it costs
to gain a unit of a health outcome, like a life year gained or a death
prevented.
For example, in the case of health care:
•What is the best way to prevent heart attacks?
•What drugs are most cost effective in the treatment of illness?
•What is the least cost way of providing nutrition to poor children?
•Which of the programs is most cost effective for AIDS prevention?
Cost Effectiveness Analysis
Examples of application to other areas:
•Choosing from two school systems that give same
education benefits
•Centralized schools that require bus transportation
and more expensive
•smaller schools to which students can walk.
Two types of court systems
•More court rooms at the headquarters or mobile
courts.
•Alternative ways of supplying potable water to
communities.
•Alternative technologies to generate electricity
Thermal vs hydro;
Example in health care
The main goal of an corporate enterprises
are:
•Profit maximisation.
•Sales maximisation.
•Increased market share.
•Social/environmental concerns.
•Profit satisficing.
•Co-operatives.