BLOCK -2 : MANAGERIAL ECONOMICS -1

UNIT -1: INTRODUCTION TO MANAGERIAL ECONOMICS

STRUCTURE

1. INTRODUCTION
2. OBJECTIVES
3. NATURE AND SCOPE OF MANAGERIAL ECONOMICS
4. MANAGERIAL ECONOMICS AND OTHER DISCIPLINES
5. MICROECONOMICS VERSUS MACROECONOMICS
6. SUMMING UP
7. KNOW YOUR PROGRESS
8. KEY WORDS
9. FURTHER READINGS/REFERENCES
10. MODEL ANSWERS
1. INTRODUCTION

Economics is the study of the be behaviour of human beings in producing, distributing and
consuming material goods and services in the world of scarce resources. Management is the
discipline of organizing and allocating the firm’s scarce resources to achieve its desired
objectives. Managerial Economics refers to the application of economic theory and the tools of
analysis of decision science to examine how an organization can achieve its aims or objectives
most efficiently

Economics can be divided into two broad categories, microeconomics and macroeconomics.
Macroeconomics is the study of the overall economy and its aggregates such as Gross National
Product, Inflation, Unemployment, Exports, Imports, Taxation Policy etc. Macroeconomics
addresses questions about changes in investment, government spending, employment, prices,
exchange rate of the rupee and so on. Importantly, only aggregate levels of these variables are
considered in the study of macroeconomics. But hidden in the aggregate data are changes in
output of a number of individual firms, the consumption decision of consumers and the changes
in the prices of particular goods and services.
Although macroeconomic issues are important and occupy the time of media and command the
attention of the newspapers, micro aspects of the economy are also important and often are of
more direct application to the day to day problems facing a manager. Microeconomics deals with
individual actors in the economy such as firms and individuals. Managerial economics can be
thought of as applied microeconomics and its focus is on the interaction of firms and individuals
in markets. When you read a newspaper or switch on a television, you hear economic
terminology used with increasing regularity. For a manager, some of these economic terms are
of direct relevance and therefore it is essential to not only understand them but also apply them
in relevant situations.
2. Objectives
After completing this Unit, you should be able to:

 understand the nature and scope of managerial economics;

 familiarize yourself with concepts of economics;
 develop some insight into economic issues;
 acquire some information about economic institutions;
 understand the relationship of Managerial Economics with other disciplines.
3. NATURE AND SCOPE OF MANAGERIAL ECONOMICS
Management decision problems arise in any organization – be it a firm, a non-profit
organization, or a government agency – when it seeks to achieve some goal or objective
subject to some constraints (Figure 1). For example, a firm may seek to maximize profits
subject to limitations on the availability of essential inputs and in the face of legal
constraints. A hospital may seek to treat as many patients as possible at an adequate medical
standard with its limited physical resources(physicians, technicians, nurses, equipment, beds)
and budget. The goal of a state university may be to provide an adequate education to as
many students as possible, subject to the physical and financial constraints it faces.
Similarly, a government agency may seek to provide a particular service to as many people
as possible at the lowest possible cost. In all these cases, the organization faces management
decision problems as it seeks to achieve its goal or objective, subject to the constraints it
faces. The goals and constraints may differ from case to case, but the basic decision-making
process is the same.

Management Decision Problem

Economic Theory:
Microeconomics, Decision sciences:
Macroeconomics Mathematical economics

MANAGERIAL ECONOMICS: Application of

economic theory and decision science tools to
solve managerial decision problems

OPTIMAL SOLUTION TO
MANAGERIAL PROBLEMS
 Figure 1 The Nature of Managerial Economics
4. MANAGERIAL ECONOMICS AND OTHER DISCIPLINES
The organization can solve its management decision problems by the application of
economic theory and the tools of decision science. Economic theories seek to predict and
explain economic behaviour. For example, the theory of the firm assumes that the firm seeks
to maximize profits. On the basis this assumption, the firm predicts the quantity of output
that it should produce. Managerial Economics is also closely related to the decision sciences.
It uses the tools of mathematical economics and econometrics to construct and estimate
decision models aimed at determining the optimal behaviour of the firm. There is a
relationship between Managerial Economics and the functional areas of business
administration studies such as accounting, finance, marketing, personal and human resource
management and production. The Managerial Economics is an overview course that
integrates economic theory, decision sciences, and the functional areas of business
administration studies.
5. MICROECONOMICS VERSUS MACROECONOMICS
Microeconomics  is the study of decisions that people and businesses make regarding the
allocation of resources and prices of goods and services. This means also taking into account
taxes and regulations created by governments. Microeconomics focuses on suppy and demand
and other forces that determine the price levels seen in the economy. For example,
microeconomics would look at how a specific company could maximize it's production and
capacity so it could lower prices and better compete in its industry.
Macroeconomics, on the other hand, is the field of economics that studies the behavior of the
economy as a whole and not just on specific companies, but entire industries and economies.
This looks at economy-wide phenomena, such as Gross Domestic Product (GDP) and how it
is affected by changes in unemployment, national income, rate of growth, and price levels.
For example, macroeconomics would look at how an increase/decrease in net exports would
affect a nation's  balance of trade and GDP and unemployment.

While these two studies of economics appear to be different, they are actually interdependent
and complement one another since there are many overlapping issues between the two fields.
For example, increased inflation (macro effect) would cause the price of raw materials to
increase for companies and in turn affect the end product's price charged to the public. 

The bottom line is that microeconomics takes a bottom up approach to analyzing the economy
while macroeconomics takes a top down approach. Regardless, both micro- and
macroeconomics provide fundamental tools for any management professional and should be
studied together in order to fully understand how businesses operate and earn revenues thus,
how an entire economy is managed and sustained. 

6. SUMMING UP
Managerial economics is used by firms to improve their profitability. It is the economics
applied to problems of choices and allocation of scarce resources by the firms. It refers to the
application of economic theory and the tools of analysis of decision science to examine how
an organisation can achieve its objective most efficiently. Managerial decisions are evaluated
through concepts, tools and techniques of economic analysis of various types. It is linked
with various fields of study.

7. KNOW YOUR PROGRESS

1. Discuss the nature and scope of managerial economics.
2. Bring out the distinction between microeconomics with macroeconomics. Although
managerial economics is based primarily on microeconomics, explain why it is also
important for managers to understand macroeconomics.
3. Justify that managerial economics is economics applied in decision-making.

8. KEY WORDS
Resources; consumer; microeconomics and macroeconomics; optimal solution;
organization; goals; constraints
9. FURTHER READINGS/REFERENCES
1. Petersen, H. Craig and W. Cris Lewis, 2001 “Managerial Economics”, Fourth
Edition, Pearson Education Asia
2. Dominick Salvatore and Ravikesh Srivastava “Managerial Economics: Principles
and World Wide Apllications” Sixth Edition, Oxford University Press.
3. Ravindra H Dholakia, Ajay N Oza (1996). Microeconomics for Management Students,Oxford
University Press
 10. MODEL ANSWERS

1. Scope of Managerial Economics: Scope is something which tells us how far a particular subject will
go. As far a s M a n a g e r i a l E c o n o m i c i s c o n c e r n e d i t i s v e r y w i d e i n s c o p e . I t
t a k e s i n t o account almost all the problems and areas of manager and the firm. It deals with Demand
analysis, Forecasting, Production function, Cost analysis, Inventory Management, Advertising, Pricing
System, Resource allocation etc.

2. Nature of Managerial Economics: Managers study managerial economics because it gives them insight
into the reign the functioning of the organization. If manager uses the principles applicable to economic
behaviour in a reasonably, then it will result in smooth functioning of the organisation. Managerial
Economics is a science because it can be compared to science in a sense that it fulfils the criteria of being a
science in following sense:Science is a Systematic body of Knowledge. It is based on the methodical
observation. Managerial economics is also a science of making decisions with regard to scarce resources
with alternative applications. It is a body of knowledge that determines or observes the internal and external
environment for decision making. In science any conclusion is arrived at after continuous experimentation.
In Managerial economics also policies are made after persistent testing and trailing. Though economic
environment consists of human variable, which is unpredictable, thus the policies made are not rigid.
Managerial economist takes decisions by utilizing his valuable past experience and observations. Managerial
economist is required to have an art of utilising his capability, knowledge and understanding to achieve the
organizational objective. Managerial economist should have an art to put in practice his theoretical
knowledge regarding elements of economic environment.