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•Christ College of Engineering

and Technology
Managerial Economics

Subject Code - MBAH013

 UNIT -1
Introduction to Managerial Economics: Definition,
Nature, Scope, Importance and General Foundation of
Managerial Economics. Circular flow of activities.
Nature of firm; Objectives of firm; Theory of firm
Forms of Organizations-Sole Proprietorship;
Partnership; Joint Stock Company; Cooperatives; Public
Enterprises. .
Relevance of demand analysis in Business Decision-
making: Law of Demand; Elasticity of Demand;
Determinants of Demand; Individual, firm and Market
demand; Demand Curve and its nature; Demand
Forecasting Techniques.
 Introduction to Managerial Economics

• Managerial economics is the application of various economic

measures, policies, principles, tools, methods, and theories to
enable decision-making and problem-solving. It highlights
techniques for efficient utilization of financial, human, and
material resources so that profits can be maximized.
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• Economics is a study of human activity both at individual and

national level. Any activity involved in efforts aimed at earning

money and spending this money to satisfy our wants such as food,

Clothing, shelter, and others are called “Economic activities”.

• Managerial economics is a branch of economics involving the

application of economic methods in the organizational decision-

making process. Economics is the study of the production,

distribution, and consumption of goods and services.

 Definition
• Adam Smith is called the "father of economics" because
of his theories on capitalism, free markets, and supply and
demand.
• To Quote Mansfield, “Managerial economics is
concerned with the application of economic concepts and
economic analysis to the problems of formulating rational
managerial decisions.
• Spencer and Siegelman have defined the subject as “the
integration of economic theory with business practice for
the purpose of facilitating decision making and forward
planning by management.”
Nature of Managerial Economics
• Art and Science: Managerial economics requires a lot of logical thinking
and creative skills for decision making or problem-solving. It is also
considered to be a stream of science by some economist claiming that it
involves the application of different economic principles, techniques and
methods, to solve business problems.

• Micro Economics: In managerial economics, managers generally deal with

the problems related to a particular organisation instead of the whole
economy. Therefore it is considered to be a part of microeconomics.
• Uses Macro Economics: A business functions in an external environment,
i.e. it serves the market, which is a part of the economy as a whole.
Therefore, it is essential for managers to analyze the different factors of
macroeconomics such as market conditions, economic reforms, government
policies, etc. and their impact on the organisation

• Multi-disciplinary: It uses many tools and principles belonging to various

disciplines such as accounting, finance, statistics, mathematics, production,
operation research, human resource, marketing, etc.
• Prescriptive / Normative Discipline: It aims at goal achievement and deals
with practical situations or problems by implementing corrective measures.

• Management Oriented: It acts as a tool in the hands of managers to deal

with business-related problems and uncertainties appropriately. It also
provides for goal establishment, policy formulation and effective decision
making.

• Pragmatic: It is a practical and logical approach towards the day to day

business problems.
 Micro-Economics
• Theory of Demand: The demand theory emphasises on the consumer’s
behaviour towards a product or service. It takes into consideration the
needs, wants, preferences and requirement of the consumers to enhance
the production process.

• Theory of Production and Production Decisions: This theory is

majorly concerned with the volume of production, process, capital and
labour required, cost involved, etc. It aims at maximising the output to
meet the customer’s demand.
• Pricing Theory and Analysis of Market Structure: It focuses on the price
determination of a product keeping in mind the competitors, market conditions, cost
of production, maximizing sales volume, etc.

• Profit Analysis and Management: The organizations work for a profit. Therefore
they always aim at profit maximization. It depends upon the market demand, cost of
input, competition level, etc.

• Theory of Capital and Investment Decisions: Capital is the most critical factor of
business. This theory prevails the proper allocation of the organisation’s capital and
making investments in profitable projects or venture to improve organisational
efficiency.
Macro-Economics
• Economic Environment: The economic conditions of a country, GDP,
economic policies, etc. indirectly impacts the business and its operations.

• Social Environment: The society in which the organisation functions also

affects it like employment conditions, trade unions, consumer cooperatives,
etc.

• Political Environment: The political structure of a country, whether

authoritarian or democratic; political stability; and attitude towards the
private sector, influence organizational growth and development.
 Importance and General Foundation of
Managerial Economics
• Managerial economics involves the use of economic theories and principles
to make decisions regarding the allocation of scarce resources. It guides
managers in making decisions relating to the company's customers,
competitors, suppliers, and internal operations.
Define the Problem - The first step in making a business decision is to understand the

problem in its entirety. Without correct analysis of the problem, any solution developed

will be inadequate. Incorrect problem identification can sometimes cause the problem

that is trying to be solved.

Determine the Objective -The second step is evaluating the objective of the decision, or

what the decision is trying to achieve. This step is determining a possible solution to the

problem defined in step Multiple possible solutions to the problem previously identified

may be established.
Discover the Alternatives - After in depth analysis into what is required to solve the
problem faced by a business, options for potential solutions can be

collated. In most cases, more than one possible solution to the problem exists. For
example, a business striving to gain more attraction on social media could improve the
quality of their content, collaborate with other creators or a combination of the two.

Forecast the Consequences -This step involves assessing the consequences of the
problem's solutions detailed in step 3. Possible consequences of a business decisions
could include; productivity, health, environmental impacts and risk
Here, managerial economics is used to determine the risks and potential financial

consequences of an action
Make a Decision

After the consequences and potential solutions to the problem at hand have been
analyzed, a decision can be made. At this point, the potential decisions should be
measurable values which have been quantified by managerial economics to maximise
profits and minimize risk and adverse outcomes of the firm.This step includes a
sensitivity analysis of the solution. A sensitivity analysis of the selected solution details
how the output of the solution changes with changes to the inputs.The sensitivity analysis
allows the strengths and weaknesses of the designed solution to be analyzed.