Chapter One

Introduction
1.Meaning of Managerial
Economics
 Managerial economics is “the integration of
economic theory with business practice for the
purpose of facilitating decision-making and forward
planning by management”.

 Managerial economics is a study of application of

managerial skills in economics. It helps in
anticipating, determining and resolving potential
problems. These problems may pertain to costs,
prices or forecasting future market.
1.Meaning of Managerial
Economics( cont.)
 Managerial economics is the application of
economic theory and methodology to
decision-making problems faced by both
public and private institutions.

 Managerial economics bridges the gap

between 'theories' and 'practice'.
2.The Theory of The Firm
 To understand the behavior of managers, we
must understand the behavior of the firm.
 Although management styles differ greatly in
millions of firms all over the world, there is
little variance in the goals of managers.
 The goal of any manager is to increase the
value of his organization.
What Is Profit .3
 Accounting Profits
– Total revenue (sales) minus dollar cost of
producing goods or services
– Reported on the firm’s income statement

 Economic Profits
– Total revenue minus total opportunity cost
– The difference in the two concepts reflects the
difference in their focus
Why Managers Need To.4
Know Economics
 Managers are responsible for achieving the
objective of the firm to the maximum possible
extent with the limited resources placed at
their disposal.
 Resources like capital, workforce and
material are limited and scarce.
 There are legal constraints facing managers.
Why Managers Need To.4
Know Economics (cont.)
 Choice of business and the nature of products,
 Choice of size of the firm,
 Choice of technology,
 Choice of price,
 How to promote sales,
 How to face competition,
 How to decide on new investments,
 How to manage profit and capital,
Principal-agent Problem.5
 Occurs when owners can only imperfectly monitor
the behavior of employees

 Occurs when managers achieve their own

objectives, even though this decreases the profit of
the owners.

 In other words, one person, the principal, hires an

agent (e.g. a sales or finance manager) to perform
tasks on his behalf but he cannot ensure that the
agent performs them in precisely the way the
principal would like. The decisions and the
performance of the agent are impossible and/ or
expensive to monitor and the incentives of the agent