Introduction:

 What is Economics?
The branch of knowledge concerned with the production, consumption, and
transfer of wealth.
 An Economy exists because of two basic facts;
• (i) Human wants for goods and services are unlimited,
• (ii) Productive resources with which to produce goods and services are scarce.
• A society is faced with the problem of choice – choice among the vast array of
wants that are to be satisfied.
 Modern economic theory is founded on the writings of the Scottish philosopher
Adam Smith (1723–90), in his best-known work An Inquiry into the Nature and
Causes of the Wealth of Nations (1776).
 “Economics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.” Lionel Robbins (1935)
Cont.
 Economics as a science is concerned with the problem of allocation
of scarce resources among the competing ends.
 The fundamental problems in Economics : resource allocation and
scarcity.
• Resources are all of the ingredients needed for production (Land,
Labour, Capital and Entrepreneurship).
• Scarcity refers to the essential fact that people’s wants or desires
are always going to be greater than the resources available to
fulfill those wants.
Cont.
 Economics takes into account how choice is made by individuals,
families, firms, governments and nations, concerning the allocation
of limited resources, to fulfil their unending wants, in such a way
that maximum satisfaction can be derived. It aims at solving the
basic issue of scarcity of resources when the human wants are
unlimited and there are alternative uses of the resources.
 In order to meet the needs of its people, every society must answer
three basic economic questions:
• What should we produce?
• How should we produce it?
• For whom should we produce it?
Cont.
 For every society, the answers to the three basic questions depend
on what kind of economic system it uses.
 The term economic system refers to the way in which a society
organizes the production and distribution of good and services.
 The system that a society chooses reflects the philosophical and
political ideas on which that society is founded. Historically, there
have been three basic types of economic system;
• Traditional Economic System,
• Command Economic System, and
• Market Economic System.
Economics Vs. Economy
• Economics is the study of an economy, i.e. its structure, condition,
working, performance, issues, remedies, etc. It includes the analysis
of the different types of the economic system, economic decisions
and its implementation by various economic units, such as individual,
family, institutions, government, etc.
• Economy indicates a region, a particular area or country, concerning
production, distribution, consumption, and exchange of goods and
services, and supply of money.
Cont.
 There are two branches of economics:
 Micro Economics –It studies the behaviour and actions of individual
economic agents, such as a person, a household, a firm, or an
industry.
 Macro Economics - the broad issues of the economy are studied,
such as economic growth, unemployment, trade balance, poverty,
the standard of living, inflation, etc. It studies the economy as a
whole.
What is 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.
 Different scholars have define the subject differently, however, the
following features seem common to these viewpoints:
• Concerned with decision-making of economic nature. It deals with
identification of economic choices and allocation of scarce
resources.
• It is goal oriented and prescriptive. It deals with how decisions
should be made by managers to achieve the organizational goals.
• Pragmatic: It is concerned with those analytical tools which are
useful in improving decision making.
Cont.
• Conceptual and metrical: It provides necessary conceptual tools to
solved and achieve the problems. It helps to decision-makers by
providing measurement of various economic entities and their
relationships. This metrical dimension of managerial economics is
complementary to its conceptual frameworks.
• It provides a link between traditional economics and the decision
sciences for managerial decision-making.
Cont.
Decision
problem

Traditional Managerial Decision

economics sciences
economics

Optimal solution to
business problems
Nature/Characteristics of Managerial Economics.
 Managerial economics is microeconomics in character, where the
unit of study is a firm.
 It concerned with normative microeconomics. Managerial
economics tells us what objectives a business should pursue and
how they should be set.
 Managerial economics concentrates on making economic theory
more application oriented. Thus, managerial economics is more
pragmatic.
 It takes the help of macroeconomics so as to understand the
external conditions which are relevant to the business.
Cont.
 Managerial decision making is influenced by (besides economic)
human and behaviourial considerations, technological factors and
environmental forces.
 Human and behaviourial considerations includes factors like
employee moral and motivation.
 Technological factors consist of evaluation of technological
alternatives, the emerging new techniques of production the
possibilities and direction of technological change by the competing
firms.
 Environmental forces include the considerations like domestic and
international business conditions, government policies, political and
social situations.
Characteristics of Managerial Economics
 Microeconomics in character as it concentrates only on the study of
the firm and not on the working of the economy.
 It takes the help of macroeconomics to understand and adjust to the
environment in which the firm operates.
 It is normative rather than positive in character. It is prescriptive
rather than descriptive. That is, it is concerned with the type of
decisions that the firm should take in order to prosper, which involves
value judgments and not a mere descriptive of bahaviour of the firm.
 It is both conceptual and metrical. It takes the help of conceptual
framework to understand and analyse the decision problems and
takes the help of quantitative techniques to measure the impact of
different factors and policies.
Cont.
 The contents of managerial economics are based mainly on the
‘theory of firm’. It is only for the analysis of profits that help is taken
of the ‘theory of distribution’.
 Knowledge of managerial economics helps in making wise choices.
Significant of Managerial economics
 Managerial economics helps the decision making process in the
following ways;
 Provides a number of tools and techniques. With the help of these
models the manager can capture the essential relationships that
represent the real situation while eliminating the relatively less
important details.
 Provides most of the concepts that are needed for the analysis of
business problems. These concepts have proved their value in
solving various kinds of managerial problems. Concepts of elasticity
of demand, fixed and variable costs, short and long run costs,
opportunity costs, net present value etc. all help in understanding
and solving decision problems.
Cont.
 What should be the product mix?
 Which is the production technique and the input mix that is least
cost?
 What should be the level of output and price for the product?
 How to take investment decision?
 How much should the firm advertise?
 How to allocate an advertisement fund between different media?