Managerial economics=Management + Economics

Management deals with principles which helps in decision making under uncertainty and improves effectiveness of the organisation. It deals with the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management.
Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decisionmaking process within the firm or organization.” Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”

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Howard Davies and Pun-Lee Lam “It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics.” Managerial economics is concerned with decision making of economic nature. Managerial economics is both „conceptual and metrical‟.

Managerial economics provides a link b/w traditional economics and the decision sciences for managerial decision making.

Managerial economics .

 Thus decision making and forward planning go hand in hand. raw materials.  . forward planning has to be made to achieve the targets in terms of production.Nature of managerial economics Decision making and forward planning  Business manager‟s prime function is decision making and forward planning  It implies selecting one of the many alternative decisions.  Thus decision making function is one of making choices for the most efficient use of resources or desired ends..  Forward planning means establishing plans or future  The question of choice arises due to scarcity of resources and their possible alternative uses.  Once a decision is made or a goal is set. pricing. capital. labour etc.

In the case of managerial economics.industry.The micro-economics analysis deals with the problems of an individual to be technically as well as economically efficient.Cont…… Managerial economics is concerned with the business firm and the economics problems that every business management need to solve.consumer. Micro-economics Analysis.  Macro-economics conditions-Decisions of the firm are made almost always within the broad framework of economic environment within which the firm best to use the available scarce resources between various activities of the firm.  .micro-economics helps in studying what is going on within the firm. known as macro-economics conditions.etc.

Similarly.pricing. Managerial economics concentrates on making economic theory more application-oriented.cost. where the unit of study is a firm. Is needed for decision . Managerial economics tells us what objectives a business should pursue and how they should be set.Cont……     Managerial economics is micro-economic in character. production relation.etc are all necessary for the purposes of forecasting by the firm.predicting about the demand. The estimation of elasticities of demand. Managerial economics attempts to estimate and predict the economic quantities and relationships.etc.

Decision-making needs a balance between simplification of analysis to be manageable and complications for handling a variety of factors and objectives. .SIGNIFICANCE OF MANAGERIAL Economics  Management is concerned with decisionmaking.  Managerial economics provides most of the concepts that are needed for the analysis of business problems. Managerial economics helps the decisionmaking process in the following ways.

. Managerial economics is helpful in making decisions such as the following:  What should be the product-mix?  Which is the production technique and the input – mix that is least costly?  What should be the level of output and price for the product?  How to take investment decisions?  How much should the firm advertise and how to allocate an advertisement fund between different media?  .Cont……….

Scope of managerial economics • Cost analysis • Demand analysis and forecasting • Production and supply analysis • Pricing decisions. and Capital management . policies and practices • Profit management.

.  Managerial economics and Mathematics. Managerial economics and Operation research.Cont………….  .  Managerial economics and theory of decision-making.  Managerial economics and Traditional economics .  Managerial economics and statistics.

Roles of bussiness economist  The role of Business Economist becomes important in the view of the different objectives of the firm. large companies employ Business Economist or Managerial Economist to assist the management. . He has a significant role t play in assisting the management of the firm in decisionmaking and forward planning by using specialized skills and techniques. In advanced countries.

If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity. is a branch of economics that applies microeconomic analysis to specific business decisions. Lagrangian calculus (linear). It draws heavily from quantitative techniques such as regression analysis and correlation. . Managerial economics (also called business economics). it bridges economic theory and economics in practice. As such. for example through the use of operations research and programming.

Market research and continue gathering of information. Business economists perform such tasks as forecasting the business environment. and collecting and processing data. interpreting the impact of public/governmental policy on the firm.  Investigate the economic condition sorrounding your small business activity such as industry trend and competetion. ..

Cost Concept Theory Theory of cost of Revenue .

. Cost of production mainly depends on quality of production. makes of factors of production.Theory of cost: What is cost of production? -In order to produce a good. every firm. The amount spent on the use of factors of production is called cost of production.

” . in an economy. could have produced. related. “Opportunity cost of a particular product is the value of the foregone alternative products that resources used in its production. supply of economic resources is limited. In the words of Leftwitch. relative to their demand.Opportunity cost: According to this concept.

costs are studied in two parts on the basis of time-period: 1)Costs in the short-run 2)Cost in the long-run. Cost are: 1) Total cost 2) Average cost 3) Marginal cost .The traditional theory of cost: Under traditional theory.

” These costs do not change with change in the quantity of output. License Fee. Depreciation. to Anatol Murad . .“Fixed costs are costs which do not change with change in the quantity of output. Normal profit.Cost in the short-run 1)Total cost- Total cost of production is the sum of all expenditure incurred in producing a given volume of output. TC = TFC + TVC i. total costs are composed of two costs.) Total fixed costsIn the short period. In the short period. Fixed costs included the following expenditure: Rent. Interest on fixed capital. cost of fixed factors are called fixed costs acc. Salary of administrative staff.

(b) it continues to rise at a diminishing rate till production reaches the level of normal capacity. variable costs rise at a diminishing rate due to the operation of law of increasing returns. Wear & tear expense. these costs also fall to zero. Rate of increase in these costs is determined by the law of variable proportions. (c) after crossing the point of normal capacity. Electricity charges. Wages of labour.” These costs undergo a change with change in output.) Total Variable Costs or Prime costs- Variable costs are those costs which are incurred on the use of variable factors of production. “Variable cost is one which varies as the level of output varies. Variable costs are. These costs rise in three stages:(a) Initially. To Dooley. If output rises these costs also rise. Acc. these costs begin to rise at an increasing rate.ii.Expenses on raw mat. When production falls to zero. because of the operation of law of diminishing returns. ..

i.” AC = TC/Q Average cost is composed of two type of costs in the short period: (a) Average fixed cost- Average fixed cost equal to total fixed cost divided by output. “Average cost is total cost divided by output.e.. In the words of Ferguson.. AVC = TVC/Q .e. i. AFC = TFC/Q (b) Average variable cost- Average variable cost is total variable cost divided by output.(2) Average cost: Per unit cost of a good is called its average cost.

To Ferguson. “ Marginal cost is the addition to total cost due to the addition of one unit of output.” . Q = change in quantity produced] Acc. Its formula is: MC= TC/ Q [ TC = change in total cost.(3) Marginal costAddition made to total cost by the production of one more unit of a commodity is called marginal cost.

(2) Long-run average cost. (1) Long-run total cost. . The long-run is the period in which all factors are variable. there three concept of costs in the longrun also. All costs become variable costs in the period. In order to know about the production plans of a firm. No cost is a fixed cost in the longrun. This fact is expressed as: LTC ≤ STC. but it is never more than short-run total cost. namely. As in the case of short-run. but it formulate long-run production plans. (1)Long-run total costLong-run total cost is always less than or equal to short-run total cost.Cost in the long-run: Each firm operates under short-run production condition. (3) Long-run managerial cost. it becomes essential to study long-run cost.

Each plant has its short-run average cost curve with whose help we can estimate long-run average cost. In the long period. due to production of one more or one less unit of a commodity. each firm can make use of different sizes of plants. in the long-run. . (3)Long-run marginal costChange in the total cost. is called long-run marginal cost.(2) Long-run average costlong-run average cost refer to minimum possible per unit cost of producing different quantities of output of a good in the long period.

. Net incomecan be calculated by subtracting expenses from revenue. It also includes all net sales. this is the total amount of money received by the company for goods sold or services provided during a certain time period.What is Revenue ??????  For a company. interest and any other increase in owner's equity and is calculated before any expenses are subtracted. exchange of assets.

Revenue Analysis is further categorized into types which have described below: .Theory of Revenue  Revenue is defined as the aggregate amount of cash obtained by the organization by selling goods and providing services for the duration of a particular time span.

TR = Total Revenue Q = Units of Quantity AR = Average Revenue . TR can be calculated by any of the two ways mentioned below: First method.Total Revenue (TR)  Total Revenue signifies the total amount a company obtains by carrying out product sales and offering services. TR = Q * AR (Price) Where. Further.

MR = Marginal Revenue TR = Total Revenue .Marginal Revenue (MR) Marginal Revenue is defined as the change in TR resulting from per unit augment in the sales. MR = TRn-1 Where.

Average revenue represents the average sale price per unit of commodity. For example.then the average revenue will be 1000/100 = Rs. 1000/. We may also say that AR = Price. AR = Average Revenue TR = Total Revenue Q = Quantity sold . for Rs. AR = TR/Q Where.Average Revenue (AR)  It is found by dividing total revenue by the numberof units sold. a firm sells 100 hats. 10.

Seema. Niranjan and Renu Bisnoi . Swati.THANK YOU by: Submitted Mamta.

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