Meaning, Scope & Methods of

Managerial Economics
 Managerial Economics
Objectives:
• After studying the chapter, you should
understand:
1. The subject matter of Managerial Economics
2. The analytical approach used in Managerial
Economics
 What is Economics
• Economics is usually defined as a social science
concerned with analyzing and describing the
production, distribution and consumption of
wealth.
Robbin’s Definition : More recently. An English
economist Lionel Robbins defines Economics as “
the science which describes human behavior as a
relationship between (given ) ends and scarce
means which have alternative uses”
 Definition of Managerial Economics
• Douglas - “Managerial economics is .. the application
of economic principles and methodologies to the
decision-making process within the firm or
organization.”
• Pappas & Hirschey - “Managerial economics applies
economic theory and methods to business and
administrative decision-making.”
• Salvatore - “Managerial economics refers to the
application of economic theory and the tools of
analysis of decision science to examine how an
organisation can achieve its objectives most
effectively.”
Meaning of Managerial Economics
• Managerial Economics: Managerial economics
is essentially applied economics in the field of
business management. It is economics of business
or managerial decisions. It pertains to all
economic aspects of managerial decision making.
• It is an evolutionary science, it is a journey with
continuing understanding and application of
economic Knowledge, theories, models, concepts
and categories in dealing with emerging business
or managerial situations and problems in a
dynamic economy.
 Types Of Business Decision
• Price and Output Decision
• Demand Estimation
• Choice of a Technique of Production
• Advertising Decision
• Long-run Production Decision
• Investment Decision
 Nature of Managerial Decision
Decision Making Problem requires a choice among
alternative courses of action so as to achieve
the objective.
Lets understand this with the help of a example:
Consider Maruti Udyog Limited which
manufacturers cars. Suppose it identifies 2
possible course of action also called as
strategies to meet the growing demand of its
product.
 Nature of Managerial Decision
First Strategy is to plan for its internal expansion
of productive capacity.
Second Strategy is to take over the premier Auto
Limited and use its capacity to increase output
to meet growing demand of its product.
Objective of the firm is to maximize profits to be
earned from the expansion of output.
Let S1 stand for strategy one and S2 stand for
Strategy 2.
 Nature of Managerial Decision
The objective function for the above decision
making problem can be stated as maximise
profits (S1, S2)
To choose from the 2 alternative strategies, the
following decision rule can be made:
Choose strategy S1 if profits from S1 › profits
from S2.
Choose Strategy S2 if profits from S2 › profits
from S1
 Managerial Decision Making
Process
The 5 steps in the decision making process
Establishing Objective

Defining the Problem

Identifying Possible Alternative Course of Action

Evaluating Alternative Considering Financial,

Considering Legal and Course of Action and Technological,
Social Constraints Choosing the Best Infrastructural and Input
Constraints

Implementing and Monitoring the Decision

Managerial Economics: An Integration of
Economics, Decision Science and Business
Management
Managerial Economics: An Integration of Economics,
Decision Science and Business Management

Managerial Economics bridges the gap between

traditional economic theory and real business
practices for the purpose of facilitating
decision making and forward planning by
management.

Economic Business
Theory Management

Managerial
Economics
 Characteristics of Managerial
Economics
1. Micro Economics:- Managerial economics is
micro economics in character as it is
concerned with smaller units of the economy.
It studies the problems and principles of an
individual business firm or and individual
industry.. It assist the management in
forecasting and evaluating the trends in the
market.
 Characteristics of Managerial
Economics
2. Normative Economics :- Managerial
economics belongs to normative economics. It
is concerned with what management should
do under particular circumstances. It
determines the goals of the enterprise and
then develops the ways to achieve these
goals. It deals with the future planning, policy-
making, decision- making and making full
utilization of the available resources of the
enterprises.
 Characteristics of Managerial
Economics
3. Pragmatic :- Managerial economics is pragmatic. It
tries to solve the managerial problems in their day-
to-day functioning and avoids difficult issues of
economic theory.
4. Uses Theory of firm :- Managerial economics uses
economic concepts and principles which are know as
the theory of firm or economics of the firm. Thus, its
scope is narrower than that of Pure Economic
Theory.
 Characteristics of Managerial
Economics
5. Takes help of Macro Economics :- Managerial
economics takes help of macro economics also
because it needs an understanding of the
circumstances and environment the individual firm
or industry has to work. Issues of macro economics
whose knowledge is necessary for the successful
management of a firm or an industry are : Business
Cycles, Taxation Policies, Industrial Policy, Price and
Distribution Policies, Wage Policies and Anti-
Monopoly Policies etc.
 Characteristics of Managerial
Economics
6. Aims at helping the Management
:-Managerial economics aims at helping the
management in taking correct decisions and
preparing plans and policies in the future.
 Scope of Managerial Economics
The scope of managerial economics includes the
following subjects :
a) Theory of Demand
b) Theory of Production
c) Theory of Exchange or Price Theory
d) Theory of Profit
e) Theory of Capital and Investment
f) Environmental Issues
 Scope of Managerial Economics
a) Theory of Demand :According to Spencer and Siegelman “A
business firm is an economic organization which transforms
productivity sources into goods that are to be sold in the
market “

i) Demand Analysis: helps the management in identifying

factors that influence the demand for the products of a
firm. For eg an estimation of future sales is essential before
preparing production schedule and employing productive
resources. Thus demand analysis and forecasting is
essential for business planning.
 Scope of Managerial Economics
ii) Demand Theory : is a study of behaviour of
consumers. It answers questions such as why
do the consumer buy a particular
commodity ? How much they purchase a
commodity ? What is the effect of income,
habit and taste on the demand of a
commodity ? What are the factors influencing
the demand of a commodity ? Why and when
do consumers stop to consume a commodity .
 Scope of Managerial Economics
b) Theory of Production : Production and cost analysis is
important for smooth functioning of production process and
project planning.
Production theory helps in determining the size of firm and the
level of production.
It explains how average and marginal costs change with the
change in production
Under what conditions do costs increase or decrease?
How does total production increase when input of one of the
factors of production is increased keeping other factors
constant ?
 Scope of Managerial Economics
How can one factor of production substitute
another when all the factors are increased
simultaneously ?
How can optimum production be obtained ?
 Scope of Managerial Economics
c) Theory of Exchange or Price Theory :
It explains how the prices are determined under
different markets ?
How and to what extent advertisement can be helpful
in increasing sales of a firm in market.
Pricing is an important area of managerial economics.
Pricing policy affects the demand for the product. It
also includes pricing methods, pricing policies,
differential pricing, product line pricing and price
forecasting .
 Scope of Managerial Economics
d) Theory of Profit: Profit maximization is the aim of
every firm. Profits is the difference between total
revenue and total cost. Because of the following
factors profits are always uncertain :
i) Demand of the product
ii) Prices of the factors of production
iii) Nature and degree of competition in the market
iv) Price behaviour under changing conditions.
Hence Profit Planning and Profit Management are
necessary for improving profit earning efficiency of
the firm.
 Scope of Managerial Economics
e) Theory of Capital and Investment :
This theory explains the following issues :
i) Selection of most suitable investment
project
ii) Most efficient allocation of capital
iii) Assessing the efficiency of capital
iv) Minimizing the possibility of under
capitalization or Over- capitalization.
 Scope of Managerial Economics
f) Environmental Issues : Certain issues of macro-economics also
form a part managerial economics. These relate to social
and political environment in which a business and
industrial firm has to operate .This is governed by factors:
i) The type of economic system of the country
ii) Business cycles, industrial policy of the country
iii) Trade, fiscal and taxation policies
iv) Price and labour policy
v) General trends in economy with regards to the production,
employment, income, prices, savings and investment etc.
 Scope of Managerial Economics
vi) General trends in the foreign trade of the
country
vii) How develop is the banking sector
viii) Social structure and political system
As the management of a firm cannot have any
control over these factors, it should adjust the
plans, policies and programmes of the firm
according to these factors to offset their
adverse effect on the firm.
Significance of Managerial Economics
Spencer and Siegelman have described the
importance of Managerial economics and
industrial enterprise as follows:
1. Reconciling Traditional Theoretical Concepts to
the Actual Business Behaviour and Conditions :
Managerial economics reconciles the tools,
Techniques, models and theories of traditional
economics with actual business practices and
with the environment in which a firm has to
operate.
 Significance of Managerial Economics
2.Estimating Economic Relationships: Managerial
economics estimates economic relationship between
different business factors such as income, elasticity
of demand and cost volume of profit analysis etc.

3. Predicting Relevant economic Quantities :

Its helps the management in predicting various
economic quantities such as cost, profit, demand,
capital, production, price etc.
 Significance of Managerial Economics
4. Understanding Internal and External Forces

5. Basis of Business policies: Managerial economics is

the foundation of business policies. Business policies
are prepared on the basis of studies and findings of
managerial economics which warns the management
against all the turning points in national as well as
international economy .
Managerial Economics : Normative or
Positive
Normative Economics : Basically prescribes what
it out to be.
Positive Economics : explains the economic
phenomenon as : What is, what was and what
will be.
“Managerial Economics is a blending of pure or
positive science with applied or normative
science.”
Relationship with other Disciplines
Economics has to aspects : Positive and Normative
Economics
Normative Economics : Basically prescribes what it
out to be.
Positive Economics : explains the economic
phenomenon as : What is, what was and what
will be.
“Managerial Economics is a blending of pure or
positive science with applied or normative
science.”
 Economic and Managerial Economic
Theory
The relationship between the two theory is like that of
engineering science to Physics or of Medicine to Biology.
Both deal with problems of scarcity and resource
allocation.
The 3 contribution of Economic theory to Managerial
economics are:
1. It helps Managerial Economic by building Analytical models
which helps in analyzing the structure of Managerial
problems
2. It contributes a set of Analytical Methods which helps to
enhance the analytical abilities of a business analyst.
3. It helps to clarify Concepts used in business analysis which
helps the managers to avoid conceptual pitfalls.
 Management Theory and Accounting
Accounting refers to the recording of
transactions of the firm in certain books.
Profit Maximization is a major objective of any
firm.
In order to make correct managerial decisions, it
requires proper knowledge of cost and
revenue information. So it is necessary for a
managerial economist to be able to interpret
and use accounting data.
 Managerial Economics and Mathematics

Mathematical concepts and tools are widely

used in economic logic to solve problem
related to how firm should minimize costs,
how to maximize profits, or how to optimize
sales.
Mathematical symbols are most convenient to
handle and understand various concepts like
incremental cost, elasticity of demand etc
 Managerial Economics and Statistics
• Managerial Economics needs tools of Statistics
in more than one way:
1.Business man can correctly forecast the
demand of the product.
2.Impact on variations such as taste, fashion,
and changes in income on demand
3.It provides a sure base for decision making
 Managerial Economics and Operational
Research
Operational Research is concerned with the
complex problems arising out of the
management of men, machines, materials and
money.
 Role and Responsibilities of a
Managerial Economist
• Demand Estimation and Forecasting
• Preparation of business/sales forecast
• Analysis of the market survey
• Analyzing the issues and problems of the concerned industry.
• Assisting the business planning process of the firm
• Discovering new and possible fields of business
• Advising on pricing, investment and capital budgeting policies
• Evaluation of capital budgets
• Building micro and macro economic models
• Directing economic research activity
• Briefing the management on current domestic and global economic issues and
emerging challenges.
 Usefulness of Managerial Economics
1. Managerial Economics enables the use of economics logic
and principles to aid management decision making
2. It focuses on the most profitable use scarce resources
rather than the achievement of equilibrium prices and
quantities as pure theory of economics does.
3. It has introduced dynamism in the world of decision making
and business environment.
4. It has given rise to emergence of a new approach in
decision making Known as Corporate strategy
5. Managerial economics sharpens the business aceum
 Question Bank
Q1. Define Managerial economics . How does it
differs from traditional economics .
Q2. Discussion the Importance of Managerial
Economics with special reference to decision-
making .
Q3. Explain the role and responsibilities of a
Managerial economist.
Q4. What is the scope of Managerial Economics.