Managerial Economics

Anshuman Sinha
 What is Economics ?

OIKON
ECONOMICS + LAW OF
(Came from
NOMOUS HOUSEHOLDS
Greek word)

“A Social Science which cover’s the action

of Individual’s and group of individuals in
process of producing, exchanging and
consuming of goods and services”
 Microeconomics is the study and
analysis of behavior of individual
segments of economy, individual
consumers, workers and owner of
resources, individual firm, industries and
market of goods and services
 Strategic decision : Business action taken
as per market conditions and behavior of
rivals in ways that increase and /or
protect the strategic firm’s profit
  A manager is very careful while 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. Economic theory and economic
analysis are used to solve the problems of
Managerial managerial economics.
 Based on economic analysis for identifying problem,
Economics organizing information and evaluating alternatives.
It is goal oriented, prescriptive and aims at maximum
achievement of objectives.
 It is applied in decision making by the business
enterprise
Role and Importance of Managerial Economics

1. Useful in Business Organization, Chalking Out

Business Policies, . Help in Business Planning. Which
acts as a balance bridge between the production
tools and operating systems and where to go.
2. Helpful in Cost Control
3. Useful in Coordination of Business Activities
4. Useful In Demand forecasting
5. Helpful in Profit Planning and Control
Role and Importance of Managerial Economics

6. Helpful in Price Determination( movie tickets )

7. Useful in Understanding the Mechanism of
Economic System
8.Helpful in Analysis of Effects of Government Policies
9. Ways to Increase Productivity in Business ( e
Chaupal)
10. Gives the Right Direction
11. Distribute Profit( Tata firms )
12. Measurement of the Efficiency of the Firm
Managerial Economics

This course will deal with areas such

as demand analysis and
estimation, production and cost
analysis, price and output
determination in competitive and
imperfect markets.

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 ECONOMICS

International
Microeconomics Macroeconomics Economic
Environment
Economic Problem
Scarcity & Opportunity
Cost
What Happens When Global Firms
Move to China

 i
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.

Many U.S., Japanese, and European

firms have been moving the production
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of goods and services to other countries.

The economic
problem Sometimes called the basic or central
economic problem – asserts that an
economy's finite resources are
insufficient to satisfy all human wants
and needs. It assumes that human
wants are unlimited, but the means to
satisfy human wants are scarce
 Definition
Scarcity (also called paucity) is the
fundamental economic problem of having
ECONOMICS= seemingly unlimited human wants in a
Scarcity world of limited resources. It states that
Management society has insufficient productive
resources to fulfill all human wants and
needs.

Marketing Manager HR Manager

Finance Manager Ops. Manager
Example
Students ( 16 ) Six Chairs

SCARED RESESOURCE
Scarcity

Not all resource are scarce: Air

System to allocating scared resource: Eco
System
Basic of Economics: Scarcity necessitates
Choices
When there are competing wants & needs
of society, yet limited amount of resource
choice must be made about how to
allocate resource efficiently ( equitably )
Solution
System of allocating scared resource ?
CRITERIA:?
1. First come first serve
2. Oldest first ( seniority )
3. Merit
4. Lottery
5. Auction

CHOOSE ONE
 Either an increase in demand,
decrease in supply, or government
intervention can cause a shortage
What are the condition. ... Scarcity is the concept
reasons of that we have limited resources and
scarcity cannot meet the unlimited demand -
it has nothing to do with a market
price.
  No matter what we do, there are
The Principle
always tradeoffs.
of
Opportunity  Scarcity -- limited resources -- is the
Cost reason.
The opportunity cost of something is what
you sacrifice to get it.
 Economic Forces that Promote Long-Run

Profitability
Economic profit
vs
Accounting profit
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 Accounting Profit
The difference between the total
revenue a firm receives from the sale of
its product minus explicit costs
(“expenses”).

Profit Economic Profit

The difference between the total
Maximization revenue a firm receives from the sale of
its product minus all costs, explicit and
implicit.
Note: this includes opportunity cost,
and is therefore different than profit in a
traditional accounting sense.

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  Explicit Costs (“accounting costs” or “expenses”)
 Actual payments made to factors of production
and other suppliers
2 Types of  Implicit Costs (opportunity costs)
Costs and 2  All the opportunity costs of the resources
Types of Profit supplied by the firm’s owners
 Eg: opportunity cost of owner’s time
 Eg: opportunity cost of owner-invested funds

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 Accounting Profit
 Total Revenue – Explicit Costs
Economic Profit
Two Types of  Total Revenue – Explicit Costs –
Profit Implicit Costs
Economic Loss
An economic profit less than zero

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  Suppose Ram owns a shop (Milk/Yogurt/ Ice cream) :
 TR: Rs150,000
 Explicit Costs:
Example of  Cost of fruit and yogurt: Rs 20,000
Types of Profit  Cost of wages: Rs 22,000
 Implicit Costs:
 Ram’s forgone wages (owning a grocery shop and not working
somewhere else): Rs 34,000
 Accounting Profit:
 TR – EC = 150,000-20,000-22,000 =
108,000
 Economic Profit:
 TR – EC – IC = 150,000-42,000-34,000
= 74,000
 Economics trains you to. . . .
Think in terms of alternatives.
Evaluate the cost of individual
Thinking Like
an Economist and social choices.
Examine and understand how
certain events and issues are
related.
 The economic way of thinking . . .
Involves thinking analytically and
objectively.
THE Makes use of the scientific method.
ECONOMIST Uses abstract models to help explain
AS A how a complex, real world operates.
SCIENTIST Develops theories, collects and
analyzes data to evaluate the
theories.
 Shyam is a corn farmer earning economic profits
and Wasan is a wheat farmer receiving a normal
profit. Wasan has an incentive to become a corn
farmer because

A) His accounting profits are negative.

Additional B) He is not currently covering his opportunity costs.
Question #1
C) He could earn more than his next best alternative.
D) His accounting profits are zero.
E) He dislikes Smith and wants to undermine Smith’s
profit.
 Economic Profit = Total Revenue – Explicit costs – Implicit costs
 Economic Profit = Accounting Profit – Implicit costs (Normal profit)
 Normal Profit = Accounting Profit – Economic Profit

 Shayam is earning economic profit, he is able to cover the

explicit cost and as well as the implicit cost.
 Wasan is receiving a normal profit, he is only able to cover the
implicit cost.
 Wasan has an incentive to become a corn farmer only if he
could earn more than the normal profit.

 All rational farmers of course will choose the alternative that

yields the highest economic profit.
 Thus, Wasan will be attracted to corn farming. (C)
 Additional Question #2
 Assume you have an idea for a new fruit picking machine that will cost the
same as current fruit picking methods but will yield 10% more revenue because
it will pick more fruit and damage less. To develop the new machine you would
have to take two years off from your $25,000/year job managing the fruit
company. Should you take the time off to develop the new machine if the
current fruit revenue is $500,000? Explain.

 Should take the time off if it earns a positive Economic profit:

 Economic Profit = Accounting Profit – Implicit costs (Normal profit)
 Accounting Profit on the development of new machine > Implicit cost
 To take 2 years time off to develop the new machine, need to
forgo:
- 2 years current job salary, 2($25,000) = $50,000
 This is the opportunity cost to develop the new machine

 Revenue from the new machine, $500,000 (0.1) = $50,000

 Accounting profit = $50,000

 Economic profit = $50,000 - $50,000 = $0

 Therefore, you are indifference to take 2 years time off to develop

the new machine or to stay in the current job.