MANAGERIAL

ECONOMICS

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INTRODUCTION

What Is Economics?
Economics is a social science concerned with the
production, distribution, and consumption of goods
and services. It studies how individuals, businesses,
governments, and nations make choices about how to
allocate resources. Economics focuses on the actions
of human beings, based on assumptions that humans
act with rational behavior, seeking the most optimal
level of benefit or utility.

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 Defining Economics
Economics is a social science, which studies human behaviour in
relation to optimizing allocation of available resources to achieve
the given goals.
According to Adam Smith: “an enquiry into the nature and causes
of the wealth of nations”
Economics is art as it is a systematic body of knowledge and
economics is science, in its methodology.
Economics comes form the Greek word oikos(house) and nomos
(law).

Eg : individual household behaviour, firm, industry and nation

Economics is also a study of choice-making behaviour of the people.

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KINDS OF ECONOMIC DECISION

1. What to Produce.

2. How to Produce.

3. For whom to Produce.

4. Are resources used economically

5. Are resources fully employed.

6. Is the economy growing.

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 TYPES OF ECONOMIC ANALYSIS
Micro and Macro
Microeconomics focuses on how individual consumers and firms make
decisions.
Macroeconomics studies an overall economy on both a national and
international level, using highly aggregated economic data and variables
to model the economy.

Positive and Normative

Positive statement are factual by nature
Normative statement involve some degree of value judgment and cannot
be verified by empirical study .

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 TYPES OF ECONOMIC ANALYSIS
Short run and long run
 Shot run is a time period not enough for consumes and produce to
adjust completely to any new situation.
 Long run is a planning horizon in which consumes and produces can
adjust to any new situation.

Partial and general equilibrium

Partial equilibrium analysis studies the internal outcome of any policy
action in a single market only
General equilibrium analysis explains economic phenomena in a
economy as whole.

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 Managerial Economics

Managerial economics can be broadly defined as the study of

economic theories, logic and tools of economic analysis
that are used in the process of decision making. Economic
theories and techniques of economic analysis are applied to
analyze business problems, evaluate business options and
opportunities with a view to arriving at an appropriate
business decision.

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Douglas : Managerial economics is concerned
with the application of economic principles and
methodologies to the decision making process
within the firm or organization. It seeks to
establish rules and principles to facilitate the
attainment of the desired economic goals of the
management.

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 Characteristics
Microeconomics
Managerial economics in character as it is concerned with smaller units of
the economy. It studies the problems and principles of an individual
business rm or an individual industry. It assists the management in
forecasting and evaluating the trends of market.
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 future planning, policy making, decision
making and making full utilization if available resources of enterprise.
Pragmatic
Managerial economics is pragmatic. It tries to solve the managerial
problems in their day to day functioning and avoids di􀃞cult issues of
economic theory.

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Uses theory of Firm
Managerial Economics uses economic concepts and principles
which are known as the theory of firm or economics of the firm.
Thus, its scope is narrower than that of Pure Economic theory.
Takes the Help of Macro Economics
Managerial Economics takes the help of Macro-economics also
because it needs an understanding of the circumstances and
environment in which an individual firm or an industry has to work.
Issues of Macro-economics whose knowledge is necessary for the
successful management of a rm or an industry are : Business cycles,
Taxation policies, Industrial Policy of the government, Price and
distribution policies, Wage policies and anti- monopoly policies etc.
Aims at helping the management
Managerial economics aims at helping the management in taking
correct decisions and preparing plans and policies for future.
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Prescriptive rather than descriptive
Managerial economics is a normative and applied discipline.
It suggests the application of economic principles with
regard to policy formulation, decision making and future
planning. It not only describes the goals of an organization
but also prescribes the means of achieving these goals.
A scientic art
Managerial economics is called as scientic art because it
helps the management in the best and efficient utilization of
scares economic resources. It assists the management in
finding out the most feasible alternative. Managerial
economics facilitates good and result orientated decisions
under conditions of uncertainty.
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Scope

Demand Analysis
Cost Analysis
Pricing Practices and Policies
Profit Management
Capital Management
Analysis of Business Environment
Allied Disciplines

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 Economic Principles relevant to
Managerial Decision

Concept of Scarcity.
Concept of Opportunity cost
Production possibilities Curve.
Concept of Margin / increment
Discounting principle.

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Difference b/w Managerial and Traditional
Economics
Traditional Managerial
It has Micro & Macro aspects Micro aspect
It is both positive and normative Normative in nature
science
It deals with theoretical aspect Practical Aspect
It studies human Behavior on certain No assumptions
assumptions

We study Economic aspects of the Both economic and non-economic

problem aspects

Studies principles underlying rent, Only the principles of profit

wages, interest and profits

Limited scope Wide scope

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Importance

Basis of Business Policies

Predicting economic Quantities
Estimating economics relationship
Helpful in Understanding the External forces
constituting the environment.
Reconciling theoretical concepts of economics in
relation to the actual business behavior and
conditions.

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 MICRO ECONOMICS

The branch of economics that analyzes the market

behavior of individual consumers and firms in an
attempt to understand the decision-making process of
firms and households.
the analysis of the decisions made by individuals and
groups, the factors that affect those decisions, and how
those decisions effect others

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Micro-economics applied to internal issues :
Operational issues are of internal nature. Internal issues include
all those problems which arise within the business organization
and fall within purview and control of the management .
Some of the basic internal issues are :
What to produce
How much to produce
Choice of technology i.e. choosing of the factor –combination
Choice of price i.e. how to price the commodity
How to promote sales
How to face the price competition
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How to decide on new investments
How to manage capital and profit
How to manage inventory i.e. stock of both
finished goods and raw material
Most of the micro economic problems deals with
most of these questions.
The Law Demand
The Theory of Production
Analysis of Market Structure and Pricing
Theory 19
Profit analysis and management
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.
Theory of Capital and Investment Decisions
Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
etc. 20
 MACRO ECONOMICS

Study of the entire economy in terms of the total

amount of goods and services produced, total income
earned, level of employment of productive resources,
and general behaviour of prices.
Macroeconomics examines economy-wide
phenomena such as changes in unemployment,
national income, rate of growth, gross domestic
product, inflation and price levels.

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Macro-economics deals with external issues :
The type of economic system in the country
General trends in National Income, employment, prices,
savings and investments
Structural change in the working financial institutions viz.,
banks, insurance companies etc
Magnitude of and trends in foreign trade
Trends in labour supply and strength of capital market
Government’s economic policies i.e., industrial, monetary,
fiscal, price and foreign etc.
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Social factors viz., value system of the society,
property rights, customs and habits etc.,
Political environment i.e., democratic, authoritarian,
socialist political systems, or state attitude towards
private business man etc.
These Environmental factors have a far-reaching
bearing upon the functioning and performance of the
firms. Therefore, decision makers have to take in to
account the present and future economic, political and
social
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Conditions in the country and give due consideration
to the environmental factors in the process of decision
making.
Eg : Tata’s small car in Singur district in West Bengal

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Subject matter of Managerial Economics

Demand Analysis and Forecasting- various factors

influencing the demand for a firm’s product
Cost Analysis- uncertain and uncontrollable
Production and Supply Analysis- deals with different
production functions and their managerial use - supply of
commodities
Pricing decisions, policies and practices- price is the
genesis of the revenue of the firm
Profit Management- profit is the chief measure of
success
Capital Management - management-large sum of
money is involved- matter for top level decision
Management Eco. And other Subjects
.

Operation Statistics
Research

Managerial
Eco

Mathematics
Accounting
Managerial Economics
Is a Tool for Improving © 2003
South-
Management Decision Making Western/T
Figurehomson
1.1
Learning
Managerial Economics 10e 1–27
 Value Maximization Is
a Complex Process

© 2003
South-
Western/T
Figurehomson
1.3
Learning
Managerial Economics 10e 1–28
Responsibilities of Managerial Economist

To make reasonable profits on capital employed.

Successful forecasts
Knowledge of sources of Economic Information
His status in the firm

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 Fundamental Concepts

Opportunity cost
Incremental Principle
Incremental Cost
Incremental Revenue
Business implication of Incremental Concept
Time Perspective
Series of order
Discrimination
Discounting Principle
The Equi-marginal Principle
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Role of a managerial economist in the firm

Demand estimation and forecasting

Preparation of business /sales forecasts

Analysis of market survey to determine the nature and

extent of competition

Analyzing the issues and problems of concerned

industry

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Assisting the business planning process of the firm

Discovering new possible fields of business endeavor

and its cost-benefit analysis

Advising on prices, investment and capital budgeting

policies

Evaluation of capital budgeting etc.

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 Circular Flow Of Income, Output, Resources
And Factor Payment

Rs.(Invest)
Product Goods and Services
Markets
(Rs)

House holds
Goods and Services
Firms
House
holds Economic Resources

Income (Rs)

Economic Resources Factor Markets Factor Payments-

Rs
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DECISION MAKING AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.
“Decision making and processing information are two
important tasks of managers”

In order to make good decisions managers must be able

to obtain, process and use information. 34
 Decision
Making
Areas

Demand Production Study of Pricing and Investment

forecasting planning related decisions
economic
and cost environment decisions
revenue
decision

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Steps of Decision Making Process
.

Following are the important steps of the decision

making process. Each step may be supported by
different tools and techniques

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Step 1: Identification of the purpose of the decision
In this step, the problem is thoroughly analysed. There are a couple of
questions one should ask when it comes to identifying the purpose of
the decision.
•What exactly is the problem?
•Why the problem should be solved?
•Who are the affected parties of the problem?
•Does the problem have a deadline or a specific time-line?
Step 2: Information gathering
A problem of an organization will have many stakeholders. In
addition, there can be dozens of factors involved and affected by the
problem.
In the process of solving the problem, you will have to gather as much
as information related to the factors and stakeholders involved in the
problem. For the process of information gathering, tools such as
'Check Sheets' can be effectively used.

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Step 3: Principles for judging the alternatives
In this step, the baseline criteria for judging the alternatives should
be set up. When it comes to defining the criteria, organizational
goals as well as the corporate culture should be taken into
consideration.
As an example, profit is one of the main concerns in every decision
making process. Companies usually do not make decisions that
reduce profits, unless it is an exceptional case. Likewise, baseline
principles should be identified related to the problem in hand.
Step 4: Brainstorm and analyse the different choices
For this step, brainstorming to list down all the ideas is the best
option. Before the idea generation step, it is vital to understand the
causes of the problem and prioritization of causes.
For this, you can make use of Cause-and-Effect diagrams and Pareto
Chart tool. Cause-and-Effect diagram helps you to identify all
possible causes of the problem and Pareto chart helps you to
prioritize and identify the causes with highest effect.
Then, you can move on generating all possible solutions
(alternatives) for the problem in hand.
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Step 5: Evaluation of alternatives
Use your judgement principles and decision-making criteria to
evaluate each alternative. In this step, experience and effectiveness of
the judgement principles come into play. You need to compare each
alternative for their positives and negatives.
Step 6: Select the best alternative
Once you go through from Step 1 to Step 5, this step is easy. In addition,
the selection of the best alternative is an informed decision since you
have already followed a methodology to derive and select the best
alternative.
Step 7: Execute the decision
Convert your decision into a plan or a sequence of activities. Execute
your plan by yourself or with the help of subordinates.
Step 8: Evaluate the results
Evaluate the outcome of your decision. See whether there is anything
you should learn and then correct in future decision making. This is
one of the best practices that will improve your decision-making skills.
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