Introduction to

Managerial Economics
Introduction Name of Institution

• ‘Zen Garments’ is a large and

reputed garments
manufacturing company.

• It has established a niche for

itself in the garments
industry and is a leader in its
industry and segment.

• In summer, it being an off-

season, Zen announced a
huge ‘Off Season Sale’ and
offered a discount of 75% on
its winter wear collection.
 Introduction Name of Institution

• The Managers at Zen did not

correctly forecast such a
huge demand and so the
company was not prepared
for the overwhelming
response of the customers
to this sale.

• The demand was so huge

that the company ran out of
its winter wear stocks and
could not fulfil all of its
customer’s demands.
Introduction Name of Institution

Now, let us see what

happened in winter?
Introduction Name of Institution

• In winter, owing to the

Christmas Season, the
discount on winter wear was
a nominal 20% as it was the
on-season.

• This time the Managers at

Zen had taken care to keep
huge stocks ready for
meeting the demand of
customers in the on-season.
 Introduction Name of Institution

• However, owing to the

nominal discount, the
demand was far less than
what the Managers had
predicted.

• Zen also incurred huge

losses due to the vast
amount of inventory of
winter wear that it had
maintained for the winter
season.
Introduction Name of Institution

• Hence, you can understand

that understanding the
concepts of demand and
supply and other concepts of
microeconomics are crucial
for the efficient working of
Managers to ensure the
smooth and successful
running of any business.
 Introduction Name of Institution

• This is where ‘Managerial

Economics’ can help
Managers as it is an
‘amalgamation of economic
theory with business
practices so as to ease
decision-making and future
planning by management.’

• Managerial Economics
assists the managers of a
firm in a rational forecasting
of demand and supply and
solving obstacles faced in
the firm’s activities.
Introduction Name of Institution

• Managerial Economics
makes use of economic
theory and concepts and
helps in formulating logical
managerial decisions.

• Managerial Economics is a
science dealing with
effective use of scarce
resources.
 Introduction Name of Institution

• It guides the managers in

taking decisions relating to
the firm’s customers,
competitors, suppliers as
well as relating to the
internal functioning of a
firm.

• Let us learn about

‘Introduction to
Managerial Economics’
in detail.
 What is Managerial Economics? Name of Institution

• Managerial Economics can be defined as:

‘Amalgamation of economic theory with business
practices so as to ease decision-making and future
planning by management.’

• Managerial Economics assists the managers of a firm in

a rational solution of obstacles faced in the firm’s
activities.
 Purpose of Managerial EconomicsName of Institution
Managerial Economics is useful wherever there are scarce resources and it
helps to ensure that managers make effective and efficient decisions
concerning customers, suppliers, competitors as well as within an
organization. The fact of scarcity of resources gives rise to the following three
fundamental questions:

What to produce? How to produce? For whom to

produce?

The purpose of use of Managerial Economics principles in a firm is to

answer these questions.
 Opportunity Cost Principle Name of Institution

• Opportunity Cost Principle

• The ‘opportunity cost’ of a

decision means the sacrifice of
alternatives required by that
decision.

• If there are no sacrifices, there

is no cost.

• According to Opportunity Cost

Principle, a firm can hire a
factor of production if and only
if that factor earns a reward in
that occupation/job equal or
greater than its opportunity
cost.
Uses of Managerial Economics Name of Institution
The use of Managerial
Economics is not limited to
profit-making firms and
organizations. But it can
also be used to help in
decision-making process of
non-profit organizations
such as hospitals,
educational institutions, etc.
It enables optimum
utilization of scarce
resources in such
organizations as well as
helps in achieving the goals
in most efficient manner.
Managerial Economics is of
great help in price analysis,
production analysis, capital
budgeting, risk analysis and
Managerial Economics & Environmental Analysis
Name of Institution
Managerial Economists should carry out a thorough analysis of the
environment of a business. Thus, Managerial Economists should
analyze the four environmental influences on a business such as:

Economic

Social

Political

Technological
 Industry Competition Name of Institution

• Role of Market Analysis in Managerial

Economics
Hence, the competition faced by
companies has been classified based on
Brand Competition the degree of product substitution in the
following categories:

IndustryCompetition
Industry Competition

Product Competition
A competition in which a company
considers all companies making the
Generic Competition same product or class of products as its
competitors is known as an ‘Industry
Competition’. For example: Pepsi would
consider all other soda manufacturers as
its competitors.
Law of Demand Name of Institution

The ‘Law of Demand’ states that there

is an inverse relationship between
quantity demanded of a commodity
and its price, other factors being
constant. In other words, higher the
price, lower the demand and vice
versa, other things remaining
constant.
Demand Curve Name of Institution

A ‘Demand Curve’ is a diagrammatic

representation of Demand Schedule.

It is a graphical representation of
price-quantity relationship.

The individual demand curve shows

the highest price which an individual
is willing to pay for different
quantities of the commodity.
 Law of Diminishing Marginal UtilityName of Institution
• Law of Diminishing Marginal Utility

• ‘Law of Diminishing Marginal Utility’ is the basic

cause of the law of demand.

• The ‘Law of Diminishing Marginal Utility’ state

that as an individual consumes more and more
units of a commodity, the utility derived from it
goes on decreasing.
Real Life Example Name of Institution

Rachel is very
fond of
mangoes. She
eats six
mangoes in ten
minutes.
Eating mangoes
gives Rachel a
sense of
satisfaction or
happiness.
Real Life Example Name of Institution

Do you think the

amount of
satisfaction that
Rachel would get
from eating the last
mango would be the
same as she gets
from the first one?
Example of Price Elasticity of Supply
Name of Institution

Let us consider an example for better

understanding of ‘Price Elasticity of Supply’.

Let’s say that for a given product X, the price

earlier was $3 and the units supplied were 300.

Now, the price increased to $3.5 and the units

supplied have changed to 500. In this case, the
calculation will be as follows:

= (500 - 300) / 300 * 100 / ($3.5 - $3) / $3 * 100

= 66.66% / 16.66%

=4
 Perishable vs. Non Perishable Name of Institution
Perishable vs. Non Perishable

• Storage capacity is not the only

issue. The supplier also needs to
consider whether or not the
goods that they hold are
perishable or not.

• Perishable goods have a limited

shelf life and the buyers know it.

• The buyers can wait for some

time and producers will have to
lower the prices or take the
losses that arise from wastage.
Role of Managerial Economics in Business
Name of Institution
Decisions Managerial Economics helps in achieving business
objectives by making strategic business decisions as
follows:
It helps to maximize organization’s response
to demands and opportunities.

It helps to overcome organization’s threats.

It helps to reverse organization’s weaknesses.

 How Managers can Apply Managerial Name of Institution
Economics?
Some of the ways in which a Manager can apply Managerial Economics
If a manager wants to increase the price of are:
the product due to increase in cost of
production, he should analyze the price
elasticity of demand for that product so
that price rise is not followed by
substantial fall in the demand of the
product. It is the application of demand
analysis to the real world situation.

Managers should determine the price and

output with the acquaintance of market
structures and approaches pertinent for
determination of price and output in the
given market setup.
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Thank you…