UNIT ONE

INTRODUCTION
Managerial Economics: Meaning and Relationships with Other
Disciplines
 What is managerial economics?
 Managerial economics is the discipline which helps a
business manager in decision making for achieving the
desired results.
 In other words, it deals with the application of economic
theory and methods to business management, decision-
making.
 Managerial economics is the integration of economic
theory with business practice for the purpose of
facilitating decision-making and forward planning by
management.

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 Con’t
 From the above said definitions, we can safely
say that managerial economics makes in depth
study of the following objectives:
 Explanation of nature and form of economic
analysis
 Identification of the business areas where
economic analysis can be applied
 Spell out the relationship between managerial
economics and other disciplines outline the
methodology of managerial economics.
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 Con’t

For example, suppose a small business try to find rapid

growth to reach a size that permits efficient use of
national media advertising. In this case what is the role
of managerial economics for this sbi?
 Used to identify pricing and production strategies
 Provides production and marketing rules that permit the
company to maximize net profits.
Relationship with Economic Theory
 Managerial Economics is related is microeconomics, which
deals essentially with how markets work and interactions
between the various components of the economy.
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 CON’T
 In particular, the following aspects of microeconomic
theory are relevant:
 Theory of the firm,
 Theory of consumer behaviour (demand),
 Production and cost theory (supply), )
 Price theory, and
 Market structure and competition theory.
 There is one main difference between the emphasis
of microeconomics and that of managerial economics:
 the former tends to be descriptive, explaining how
markets work and what firms do in practice,
 while the latter is often prescriptive, stating what
firms should do, in order to reach certain objectives.

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 Relationship with Decision Sciences
The decision sciences provide the tools and
techniques of analysis used in managerial
economics. The most important aspects are as
follows:
 Numerical and algebraic analysis,
Optimization,
 Statistical estimation and forecasting,
Analysis of risk and uncertainty, and
Discounting and time-value-of-money techniques.

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 Relationship with Business Functions
 All firms consist of organizations that are divided structurally into
different departments or units even if this is not necessarily
performed on a formal basis.
Those are :
 Production and operations,
 Marketing,
 Finance and accounting, and
 Human resources.
All of these functional areas can apply the theories and methods.
Example:
• a production department may want to plan and schedule the level of
output for the next quarter,
• the marketing department may want to know what price to charge
and how much to spend on advertising,
• the finance department may want to determine whether to build a
new factory to expand capacity, and
• the human resources department may want to know how many people
to hire in the coming period and what it should be offering to pay
them.
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 Nature and Scope of Managerial Economics
It’s Nature can be:
Microeconomics: Managerial economics is microeconomic in character.
because it studies the problems of an individual business unit.
 It does not study the problems of the entire economy. But it also uses
macroeconomics.
It takes the help of macroeconomics to understand the external
conditions such as business cycle, national income, economic policies of
government etc.
Normative science: Managerial economics is a normative science.
• It is concerned with what management should do under particular
circumstances. It determines the goals of the enterprise.
Pragmatic: Managerial economics is pragmatic. It concentrates on making
economic theory more application oriented.
 It tries to solve the managerial problems in their day-to-day
functioning.
Prescriptive: Managerial economics is prescriptive rather than descriptive.
It prescribes/ suggests solutions to various business problems.
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Uses theory of firm: Managerial economics largely uses
the body of economic concepts and principles towards
solving the business problems.
Management oriented: The main aim of managerial
economics is to help the management in taking correct
decisions and preparing plans and policies for future.
• Managerial economics analyses the problems and give
solutions just as doctor tries to give relief to the
patient.
Multi-disciplinary: Managerial economics makes use of
most modern tools of mathematics, statistics and
operation research.
 In decision making and planning it also adopts principles
such accounting and finance, marketing, production and
personnel.
 Art and science: Managerial economics is both a
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Fundamental Concepts of Managerial Economics

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 Discounting
Principle
Generally, people consider a Birr tomorrow to be worth less
than a Birr today. This is also implied by the common saying
that a bird in hand is worth than two in the bush.
 Anybody will prefer Birr 1000 today to Birr 1000 next
year. Why?
 There are two main reasons for this:
 The future is uncertain and it is preferable to get Birr
1000 today rather than a year after;
 Even if one is sure to receive Birr 1000 next year, one
would do well to receive Birr 1000 now and invest it for a
year and earn interest onTolathis
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money for one year.
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 The equi-marginal principle can be applied in different
areas of management.
 It is used in budgeting.
 The objective is to allocate resources where they are most
productive.
 It can be used for eliminating waste in useless activities.
 It can be applied in any discussion of budgeting.
 The management can accept investments with high rates of
return so as to ensure optimum allocation of capital
resources.
 The equi-marginal principle can also be applied in
multiple product pricing.
 A multi product firm will reach equilibrium when the
marginal revenue obtained from a product is equal to that
of another product or products.
 The equi-marginal principle may also be applied in allocating
research expenditures.
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 Optimization
 This is another important concept used in
managerial economics.
 Managerial economics often aims at
optimizing a given objective.
 The objective may be :
 maximization of profit or
• minimization of time or
• minimization of cost.
 The important techniques for optimization
include marginal analysis, calculus, linear
programming etc.
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 UNIT TWO
ANALYSIS OF DEMAND
Definition of Demand
 The word 'demand' can be used in a variety of senses, which often
causes misunderstanding and errors of analysis.
 Demand refers to the quantities that people are or would be willing
and able to buy at different prices during a given time period,
ceteris paribus.
This definition incorporates three important concepts:
 It involves three parameters – price, quantity and time.
 It refers to quantities in the plural, therefore a whole relationship, not
a single quantity.
 It involves the ceteris paribus (other things being equal) assumption,
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 Therefore, the term demand is always defined in combination with
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 Individual versus Market Demand

 The quantity of a commodity which an individual is willing to

buy at a particular price during a specific time period, given his
money income, his taste and price of other commodities
(particularly substitutes and complements), is called “individual’s
demand for a commodity”.
 The choices made by individuals are the basis of the theory of
demand, it is the total or market demand that is of primary
interest to managers.
 The total quantity which all the consumers of a commodity are
willing to buy at a given price per time unit, given their money
income, taste and prices of other commodities (mainly
substitutes) is known as “market demand for the commodity”.
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In other words, the market demand
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 DETERMINANTS OF MARKET DEMAND

 Traditionally, economists have placed an extremely heavy

emphasis on price as a factor influencing quantity demanded.
 However, most markets, depending on the nature of the
industry may have other most important decision variables
(factors).
EXAMPLE: In manufacturing industries the amount of advertising
budget, change in consumer tastes and preference, the design
and packaging of products may be the more significant variables
other than price that manipulated by management.
 Algebraically, the demand function can be expressed as
QD= f (P, Ps, Pc, Y, A, Ac, N, Cp, PE ...)
Where QD = quantity demand of the product

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 Con’t
 Graphically, change in the
price of the commodity will
result only in movement
along the demand curve,
where as changes in any of
the other independent
variables result in a shift of
Price
($/unit)
D2 D D1

the demand curve.

P1

P2

D'2 D' D'1

Quantity (Units)

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 CON’T

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 • PED is the percentage
change in quantity
demanded in response to a
1 per cent change in price.

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• Example :suppose that a
firm increase the price of its
product by 2 percent and
quantity demand
subsequently decreases by 3
percent. Find PED and
interpret
• Why elasticity of demand
bear negative value?.

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 Arc price Elasticity of demand

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