FROM ECONOMICS TO MANAGERIAL

ECONOMICS
 WHAT IS ECONOMICS

Individuals
Economics Households Maximize gains
studies from scarce
how Firms resources
Nations

FUNDAMENTAL
QUESTIONS

Economics provides
the methodology to Decisions regarding
Resources
answer these its utilization have to
are
fundamental be taken carefully
scarce
questions
Scarce Maximizing/
resources Optimizing
behaviour

Selecting the best out available options

so as to Maximizing/Optimizing gains
from given resources.

Individuals/ Firms Nations

Households Utilize of resources Allocate their
which are scarce to resources between
Allocate their maximize profits competing needs to
limited resources maximize economic
between various welfare of the
goods & services society
they consume to
maximize their total
 Economics is essentially the study of :
…Logic
…Tools
…Techniques
… Evaluating economic options
… Optimization techniques
… Economic theories

To make optimum use of available resources to

achieve the given ends

These are applied in the process of business decision-

making. This has led to emergence of a separate branch of
study called “MANAGERIAL ECONOMICS”
THE MEANING, SCOPE AND METHODS
OF MANAGERIAL
ECONOMICS
DEFINITIONS

“Managerial Economics is concerned with the application of

economic concepts and economics to the problems of formulating
rational decision making” … Mansfield

“Managerial economics is the integration of economic theory with

business practice for the purpose of facilitation decision making and
forward planning by management”… Spencer and Seigelman
 MANAGERIAL ECONOMICS HELPS IN
Estimation of product demand
Analysis of product demand
Planning of production schedule
Deciding the input combination
Estimation of cost of product
Analysis of cost of product
Achieving economies of scale
Determination of price of product
Analysis of price of product
Analysis of market structures
Profit estimation and planning
Planning & control of capital expenditure
 DOMESTIC PRODUCTION AND
IMPORT OF NEWSPRINT

DOMESTIC IMPORTS TOTAL

YEAR PRODUCTION (‘000 TONNES) (‘000 TONNES)
(‘000 TONNES)
1977-78 56.58 167.7 224.28
1978-79 48.06 231.9 279.96
1979-80 48.37 512.8 561.17
1980-81 49.53 305.7 355.23
1981-82 64.30 316.3 380.60
1982-83 118.91 202.0 320.91
1983-84 163.29 214.0 377.29

1. DEMAND FOR NEWS 2. INCREASE AT A COMPOUND

PRINT IS INCREASING GROWTH RATE OF 9 %
 YEAR TOTAL DOMESTIC
DEMAND (%) PRODUCTION (%)
1977-78 100 25.23
1978-79 100 17.17
1979-80 100 8.62
1980-81 100 13.94
1981-82 100 16.90
1982-83 100 37.10
1983-84 100 43.30
1 2 3
IN 1977-78 DOMESTIC IN 1983-84 DOMESTIC DEMAND-
PRODUCTION IS PRODUCTION IS SUPPLY
ONE-FOURTH ALMOST ONE-HALF GAP
THE NEED TO STUDY TO MANAGERIAL
ECONOMICS
 SUCCESS OF THE BUSINESS DEPENDS UPON

2
BEHAVIOUR
OF THE FIRM

1 3
CONSUMER MARKET
BEHAVIOUR EQUILIBRIUM

5 4
BUSINESS MACRO-
ENVIRONMENT ECONOMICS
CONSUMER DEMAND IS THE BASIS
FOR BUSINESS
BEHAVIOUR
Consumer has
wants Which leads to
CONSUMER DEMAND
He buys goods to
satisfy his Through DEMAND the
wants consumer expresses his
Goods have preferences
utility
Consumer has
He chooses goods preferences to maximise
which his utility
have utility
for him He wants to maximise his
He has limited utility with his limited
resources resources
 BEHAVIOUR OF THE FIRM

Directed Towards

Efficiency in Minimizing Maximizing

production Costs Profits

PRODUCTION COST PROFIT

FUNCTION
FUNCTION
 MARKET EQUILIBRIUM
INVOLVES AN UNDERSTANDING OF

Concept of Market Market Mechanism Market Forms

What constitutes --Demand side Types of

a market --Supply side competition
--Interaction of both
--Determination of
price
A clear understanding of how markets work is essential for

BUSINESS APPROPRIATE
DECISION MARKET STRATEGY
 MACROECONOMICS

Study of economy as a whole

Through analyzing the behaviour and interaction between

Macroeconomic variables

--- National output (GDP & GNP)

--- Aggregate employment
--- The general price level
--- Aggregate consumption
--- Savings and investment
--- Price level
--- Economic transactions with
--- the rest of
the world
THESE CREATE THE ENVIRONMENT IN
WHICH BUSINESS
 BUSINESS ENVIRONMENT

DOMESTIC
NON ECONOMIC
MACROECONOMIC
ENVIRONMENT
ENVIRONMENT

INTERNAL PUBLIC
ENVIRONMENT RELATIONS
ENVIRONMENT

THE
SECTORAL
INTERNATIONAL
ENVIRONMENT
ENVIRONMENT
 SCOPE OF MANAGERIAL ECONOMICS

DEMAND PRICE
1 ANALYSIS AND 5 SYSTEM
FORECASTING

PRODUCTION RESOURCE
2 6 ALLOCATION
FUNCTION

CAPITAL
3 COST ANALYSIS 7
BUDGETTING

INVENTORY MARKET
4 8
MANAGEMENT STRUCTURES
 DEMAND ANALYSIS AND FORECASTING
SEEKS TO KNOW

1. WHY DO CUSTOMERS BUY A COMMODITY ?

2. HOW DO THEY DECIDE ON THE QUANTITY OF A
COMMODITY TO BE PURCHASED ?
3. WHEN DO THEY STOP CONSUMING A COMMODITY ?
4. HOW DO THE CONSUMERS BEHAVE WHEN THE PRICE
OF THE COMMODITY, THEIR INCOME, TASTE AND
FASHIONS ETC. CHANGE ?
HELPS THE MANAGER

1. IN ASSESSING CURRENT DEMAND AND ESTIMATING

FUTURE DEMAND
2. HELPS IN CHOICE OF COMMODITIES FOR PRODUCTION
 PRODUCTION FUNCTION
EXPLAINS

1. HOW COSTS VARY WHEN PRODUCTION IS INCREASED

2. UNDER WHAT CONDITIONS COSTS INCREASE OR
DECREASE ?
3. VARIATION IN INPUTS (FACTORS OF PRODUCTION) AND
THEIR IMPACT ON PRODUCTION ?
4. HOW OPTIMUM SIZE OF OUTPUT IS ACHIEVED ?

HELPS IN DETERMINING

1. SIZE OF THE FIRM

2. SIZE OF THE TOTAL

 INVENTORY MANAGEMENT
EXPLAINS

1. TO THE STOCK OF RAW MATERIAL WHICH A FIRM

KEEPS
2. HOW MUCH INVENTORY IS THE IDEAL STOCK
3. IMPACT OF HIGH INVENTORY
4. IMPACT OF LOW INVENTORY
HELPS

1. IN UNDERSTANDING THE NEED FOR INVENTORY

CONTROL
2. IN CLASSIFYING INVENTORY
3. ANALYSING THE COST OF CARRYING THEM
 COST ANALYSIS

EXPLAINS

1. DETERMINANTS OF COSTS
2. METHODS OF ESTIMATING COSTS
3. THE RELATIONSHIP BETWEEN COST AND OUTPUT
4. THE FORECAST OF COST AND PROFIT

HELPS

IN EFFECTIVE KNOWLEDGE AND APPLICATION OF WHICH

IS CORNERSTONE FOR THE SUCCESS OF A FIRM.
 PRICE SYSTEM

EXPLAINS

1. HOW PRICES ARE DETERMINED UNDER DIFFERENT

MARKET CONDITIONS ?
2. WHEN PRICE DICRIMINATION IS DESIRABLE ,
FEASIBLE AND PROFITABLE ?

HELPS

1. IN DETERMININGIN PRICE POLICY OF THE FIRM

2. HELP IN DETERMINING THE OPTIMUM SIZE OF THE
FIRM
 RESOURCE ALLOCATION

EXPLAINS

1. HOW SHOULD THE FIRM ARRIVE AT THE OPTIMUM

COMBINATION OF INPUTS IN ORDER TO GET THE
MAXIMUM OUTPUT ?
2. WHENTHE PRICES OF INPUTS INCREASE WHAT TYPE
OF SUBSTITUTION SHOULD BE RESORTED TO ?

HELPS

1. IN DECIDING HOW BEST THE SCARCE RESOURCES CAN

BE ALLOTED TO COMPETING NEEDS TO ACHIEVE
OPTIMISATION.
 CAPITAL BUDGETING
EXPLAINS

1. HOW TO ARRIVE AT THE COST OF CAPITAL ?

2. HOW TO ENSURE THAT CAPITAL BECOMES RATIONAL?
3. HOW TO FACE UP TO BUDGETING PROBLEMS ?
4. HOW TO ARRTIVE AT INVESTMENT DECISIONS UNDER
CONDITIONS OF UNCERTAINTY ?
5. HOW TO EFFECT A COST BENEFIT ANALYSIS ?

HELPS

HELPS IN ARRIVING AT MEANINGFUL DECISIONS WITH

REGARD TO CAPITAL AND ITS APPLICATION
 CONCEPTS OF MANAGERIAL ECONOMICS
THE DESIRE + ABILITY TO PAY +
DEMAND WILLINGNESS TO PAY

AVAILABILITY OF A
SUPPLY COMMODITY AT A PRICE

PRICE IS THE MEETING POINT

PRICE OF DEMAND AND SUPPLY

WHEN PRODUCERS COMPETE

COMPETITION WITH EACH OTHER TO SELL
THEIR PRODUCTS

SUM OF ALL THE UNITS

PRODUCTION PRODUCED WITH THE HELP OF
FACTORS OF PRODUCTION
 DEMAND

MEANS REQUIREMENT

QUALIFIED BY

1. DESIRE TO HAVE A
COMMODITY
2. ABILITY TO PAY THE PRICE
FOR THE COMMODITY
3. WILLINGNESS TO PAY THE
PRICE FOR THE
COMMODITY
 SUPPLY

AVAILABILITY OF
ANY COMMODITY AT
A PRICE

SUPPLY IS STINTED
 PRICE

PRICE IS THE MEETING POINT

OF DEMAND AND SUPPLY

IF SUPPLY REMAINS CONSTANT

AND DEMAND GOES UP

PRICE INCREASES

IF DEMAND REMAINS CONSTANT

AND SUPPLY GOES UP

PRICE DECREASES
 COMPETITION

WHEN SUPPLY EXEEDS DEMAND , SELLERS

COMPETE AMONG THEMSELVES TO SELL
COMMODITIES AT A LOWER PRICE

PERFECT
COMPETITION

IMPERFECT
COMPETITION
 PRODUCTION

REFERS TO SUPPLY SIDE OF ANY COMMODITY

SUM OF ALL THE UNITS PRODUCED CONSTITUTES THE

SUPPLY OF A GIVEN COMMODITY

PRODUCTION OF A COMMODITY REQUIRES FACTORS OF

PRODUCTION ALSO CALLED INPUTS

LAND
LABOUR
CAPITAL
ORGANISATION
 DISTRIBUTION

STAGE - I

PRODUCTS ARE MOVED FROM

FACTORY TO
DISTRIBUTOR/WHOLESALER

STAGE - II

PRODUCTS ARE MOVED FROM

DISTRIBUTOR/WHOLESALER
TO RETAILER
CONSUMPTION AND CONSUMPTION FUNCTION
CONSUMPTION
THE PERSON WHO PURCHASES A
COMMODITY AND CONSUMES IT IS
A CONSUMER.

CONSUMPTION
FUNCTION

1. UTILITY OF THE COMMODITY

2. LEVEL OF SATISFACTION FROM
THE COMMODITY
3. PRICE OF THE COMMODITY
4. CONSUMERS INCOME
 COST

WHAT IS SPENT TO PRODUCE A PARTICULAR

COMMODITY IS CALLED COST

PRODUCTION COST
INPUTS

LAND RENT
LABOUR WAGES
CAPITAL INTEREST
ENTREPREUNER PROFIT
 MARKET STRUCTURE

ONLY ONE PRODUCER OF A

MONOPOLY
COMMODITY

A SITUATION WHERE THERE

DUOPOLY
OR TWO PRODUCERS

OLIGOPOLY THERE ARE FEW PRODUCERS

 PROFIT

COST OF + MARGIN OF
= PRICE
PRODUCTION PROFIT

COST OF = PROFIT
PRICE PRODUCTION
 OPTIMISATION

PRODUCTION CONSUMPTION

CONSUMER WORKS OUT

LEAST COST THE COMBINATION OF
COMBINATION NUMBER OF UNITS OF
OF FACTORS OF DEFFERENT
PRODUCTION COMMODITIES WHICH
YIELDS HIM THE
HIGHESTSATISFACTION
OPTIMUM
COMBINATION
OPTIMISATION
 MARGIN AND AVERAGE

CONSUMPTION PRODUCTION

A PERSON MAY A PRODUCER

CONSUME CERTAIN PRODUCES
NUMBER OF UNITS SEVERAL UNITS OF
OF A COMMODITY A COMMODITY

THE LAST UNIT THAT HE THE COST OF

CONSUMED AND DERIVED PRODUCTION OF THE
SATISFACTION LAST UNIT

IS CALLED IS CALLED
MARGINAL UNIT MARGINAL COST
UNIT COST OF AVERAGE COST OF
PRODUCTION (RS.) PRODUCTION(RS)
1 10 10.00

2 9 9.50

3 8 9.00

4 7 8.50

IF THE PRODUCER HAD STOPPED AT THE 4TH UNIT

HIS MARGINAL COST OF PRODUCTION IS RS. 7

HIS AVERAGE COST OF PRODUCTION IS RS. 8.50
 ELASTICITY

CHANGE IN QUANTITY DEMANDED DUE TO

CHANGE IN THE PRICE OF THAT COMMODITY

q .. 
= q 
 DENOTES ELASTICITY
q = CHANGE IN DEMAND
q= QUANTITY
DEMANDED  =
CHANGE IN PRICE
MICRO ANALYSIS OF FACTORS
ANALYSIS RELATING TO A SINGLE UNIT

MACRO DEALS WITH FIGURES OF THE

ANALYSIS ECONOMY AS A WHOLE
METHODS USED IN SOLVING BUSINESS PROBLEMS

SUCH AS DATA RELATING TO

INTERNAL DATA PRODUCTION,INVENTORY, SALES, ETC

DATA FROM INDUSTRY ASSOCIATIONS

ASSOCIATIONS HELPS IN KNOWING WHERE A
COMPANY STANDS IN COMPETITION

ASSOCIATION DATA IS PARTIAL

PUBLISHED DATA WHEREAS PUBLISHED DATA GIVES A
COMPLETE PICTURE

FIELD MARKET SURVEY CAN GIVE EXACT

INVESTIGATION INFORMATION ABOUT THE COMPANY
CONCERNED

SPECIALISED FIELD INVESTIGATION THROUGH

AGENCIES SPECIALISED AGENCIES
 THE COCEPT OF MARGIN

The concept of “Margin” is the

foundation of all managerial decision
processes.
 THE COCEPT OF MARGIN

Situations faced in real life

--Whether to eat the third cup of ice cream?

--Whether to devote an extra eighth hour to the study of the subject?

--Whether to further increase the TV spot advertisement?

--Whether to produce an additional block of 100 units of electricity?

All these can be successfully tackled by using the concept of

“MARGIN” and “MARGINAL ANALYSIS”
 MARGINAL ANALYSIS

Marginal Analysis is concerned with finding out the change in the

total arising because of one additional unit

Marginal Change in the Total Revenue due to

Revenue additional one unit sold

Marginal Change in the Total Cost on account of

Cost one additional unit produced
 MARGINAL REVENUE

Quantity Price, P Total Average Marginal

(units) (Rs./unit) Revenue, TR Revenue, AR Revenue, MR
(Rs.) (Rs.) (Rs.)

1 10 10 10 -

2 9 18 9 8

3 8 24 8 6

4 7 28 7 4

5 6 30 6 2

6 5 30 5 0

7 4 28 4 -2
 MARGINAL COST

Quantity Unit Cost Total Average Marginal

(units) (Rs/unit) Cost, AC Cost, MC
Cost, TC (Rs.) (Rs.)
(Rs.)
1 20 20 20 -

2 16 32 16 12

3 13 39 13 7

4 11 44 11 5

5 12 60 12 16

6 15 90 15 30

7 18 126 18 36