UNIT– 1 BASIC CONCEPTS AND

PRINCIPLES

STRUCTURE

1.0 Objectives

1.1 Introduction

1.2 Definition

1.3 Nature and scope of economics

1.4 Micro and macro economics

1.5 Managerial Economics and its relevance in business decisions

1.6 Fundamental Principles of Managerial Economics

1.6.1 Incremental Principle

1.6.2 Marginal Principle

1.6.3 Marginal Concept and Optimization

1.6.4 Concept of Time perspective

1.6.5 Equi-marginal Principle

1.6.6 Utility Analysis

1.6.7 Cardinal Utility

1.6.8 Ordinal Utility

1.7 Let Us Sum Up

1.8 Key Words

1.9 Some Useful Books

1.10 Answer to check your progress

1.11 Terminal Questions

1.0 OBJECTIVES

After studying this unit, you will be able to:

 Describe the nature of Managerial Economics.

 Identify scope of Managerial Economics
 State the need and importance of Managerial Economics
 List the functions & Types of Managerial Economics

1.1 INTRODUCTION

Economics

Economics is a social science of management of limited resources with

unlimited wants of human beings. The development and happiness of
human beings depend upon the production, distribution and consumption
of various goods and services. Man wants food, shelter and clothing
primarily. These are for his existence. He needs more in order to make his
life comfortable and joyful. These lead to exploration of various resources
and materials and technique of production, movement and consumption of
various types of goods. Man is confronted with various problems like what
to produce, how to produce, for whom to produce, are the resources
economically used, the products so produced are within the reach of men,
etc. Knowledge of economics helps to solve all these problems. Here lies
the importance of business economics

1.2 DEFINITION

According to Mc Nair and Meriam, “Business economic consists of the

use of economic modes of thought to analyses business situations.”

Siegel man has defined managerial economic (or business economic) as

“the integration of economic theory with business practice for the purpose
of facilitating decision-making and forward planning by management.”

Economics is the study of scarcity and how it affects how resources are
used, how commodities and services are produced, how production and
welfare increase over time, and a wide range of other complicated
concerns that are extremely important to society.

The study of financial, hierarchical, market-related, and environmental

concerns faced by businesses is the focus of managerial economics, a
subfield of applied finance that examines these topics. The field of
managerial economics covers a wide range of topics, including the concept
of scarcity, various item factors, appropriation, and use.

The application of financial theory and practise to corporate settings is at

the heart of managerial economics, usually referred to simply as
managerial economics. The essential resources, such as land, labour, and
work, are limited and can be utilised in optional employments. This creates
the environment for decision-making because of the limited availability of
these vital assets. The decision-making process results in one of settling
on a conclusion and making decisions that will supply the most productive
techniques for achieving an ideal aim, such as maximising of profits.

1.3 NATURE AND SCOPE OF ECONOMICS

NATURE

Art and Science: To make decisions or find solutions to issues,

management theory calls for a great deal of analytical ability. Many
economists use it as a source of research as well because it entails using
many economic theories, strategies, and methods to address business
issues.

 Microeconomics: As opposed to the economy as a whole,

managers often deal with issues that are specific to one entity. As
a result, it is viewed as being an essential component of
microeconomics.
 Applications of macroeconomics: A firm operates in the outside
world by providing services to consumers, who are an essential
component of the economy. Managers must assess the numerous
macroeconomic aspects and their impact on the business for this
reason, including market dynamics, economic shifts, governmental
policies, etc.
  Multidisciplinary: Managerial economics draws on various
techniques and ideas from a variety of fields, including accounting,
finance, statistics, mathematics, production, operational research,
human resources, marketing, etc.
 Prescriptive or Normative Discipline: Managerial Economics
seeks to accomplish the goal and resolves particular difficulties or
issues by adopting corrective measures.
 Management Oriented: This gives managers a tool to deal with a
variety of business-related issues and uncertainties. This makes it
possible to establish priorities, create policies, and come to wise
conclusions.
 Realistic and logical solutions to everyday business problems are
pragmatic.

SCOPE

When dealing with a variety of business issues within organisations,

management economics is frequently employed as a definition. The
organisation and its activities are equally impacted by macroeconomic and
microeconomic factors. The following examples highlight its importance:

Application of Microeconomics to Operational Issues

The following are some of the different microeconomic theories or

principles that have been employed to address organisational internal
issues that have arisen during corporate operations:

Demand Theory highlights how consumers behave in relation to a good or

service. This improves the manufacturing process by taking the needs,
wants, and preferences of the customers into account.

• Decisions on Production and Production Theory: This theory focuses on

factors such as production volume, process, labour and capital expenses,
etc. In order to satisfy client demand, it strives to optimise the production
analysis.

• Market Structure Pricing Theory and Analysis: This approach focuses on

determining a product's pricing while taking into account factors such as
competition, market dynamics, production costs, and maximising sales
volume.
• Profit analysis and management: Since businesses are run on assets, they
seek to maximise profit. Input costs, input demand, amount of
competition, etc. are additional factors.

• Capital allocation and investment theory: The most crucial component of

a corporation is capital. This concept takes precedence over the efficient
use of the company's resources and expenditures in worthwhile projects or
programmes to improve operational performance.

macroeconomics in the context of business

The environment in which an organisation operates has a significant

impact on that company. One definition of the corporate environment is:

• Economic environment: A nation's GDP, economic conditions, and other

factors might indirectly affect a company's operations.

• Social environment: The organisation is impacted by the society in which

it operates, including employment laws, labour unions, consumer
cooperatives, etc.

• Political environment: An organization's expansion and development are

influenced by the political system, whether authoritarian or democratic,
political stability, and stance towards the private sector of a given nation.

CheckYourProgress- 1

1. Explain the nature of economics

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2. State the definition of economics

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1.4 MICROECONOMICS AND MACROECONOMICS

MICRO ECONOMICS

The social science of microeconomics examines the effects of incentives

and choices, particularly how they affect the allocation and use of
resources. Microeconomics explains how and why different things have
varying values, how people behave and profit from efficient production
and trading, and how people may work together and coordinate best. In
general, microeconomics offers a fuller and more thorough understanding
than macroeconomics.

Basic concepts-

Incentives and behaviours: How individuals or groups respond in response

to the circumstances they face.

According to the utility hypothesis, consumers will select and use a mix
of items to maximise their enjoyment or "utility," within the limits of the
amount of money they have to spend.

Production theory: is the study of the process through which inputs are
transformed into outputs. In order to maximise their earnings, producers
aim to select input combinations and methods of combination that will
result in the lowest cost.

Price theory: The theory of supply and demand, which governs prices in a
competitive market, is the result of the interaction between utility theory
and production theory. It comes to the conclusion that the price customers
desire in a market with perfect competition

MACRO ECONOMICS

Macroeconomics is a subfield of economics that focuses on the behaviour

of the economy as a whole, including the markets, firms, customers, and
governments. Macroeconomics studies trends in the economy as a whole,
including inflation, price levels, economic growth rates, national income,
GDP, and changes in unemployment.

What causes unemployment is one of the important issues that

macroeconomics deals with. Why does inflation occur? What fuels or
encourages economic expansion? Macroeconomics makes an effort to
gauge an economy's performance, comprehend the factors that influence
it, and forecast how it can change.

Several topics fall under macroeconomics, including:

the overall price level and interest rates; the national income and output;

Trade and payment balances, the exchange rate of the currency, total
savings and investment levels, employment levels, and the rate of
economic growth are among the other factors.

1.5 MANAGERIAL ECONOMICS AND ITS

RELEVANCE IN BUSINESS DECISIONS

A subfield of economics called managerial economics deals with the use

of economic principles in managerial decision-making. Economics is the
study of how products and services are produced, distributed, and
consumed. In managerial economics, choices on how to distribute finite
resources are made using economic theories and principles.

Managers utilise economic frameworks to maximise earnings, resource

allocation, and the firm's overall output while boosting productivity and
reducing wasteful operations. By analysing real-world issues at the micro
and macroeconomic levels, these frameworks help organisations make
logical, forward-thinking decisions.

Managerial economic techniques help to guide managers in these

decisions. Managerial decisions entail forecasting (making decisions
about the future), which involves levels of risk and uncertainty.

BASIC CONCEPTS

1. Scarcity: Scarcity is one of the important concepts of economics

relevant to management. The reason for any economic problem, micro or
macro, is the scarcity of resources. The managers who decide on behalf of
the firm always face the economic problem and scarcity of one kind or the
other. A few examples to illustrate this – A production manager may be
facing scarcity of good quality of materials or skilled technicians. A
marketing manager may be encountering shortage of sales force at his
command. A finance manager may be facing the scarcity of funds
necessary for his programme. Thus, scarcity is a universal problem. The
term scarcity in terms of economics may be defined as ‘excess demand’.
At any time, for any thing if demand (requirement) exceeds supply
(availability) that thing or good is said to be scarce, i.e., the demand in
relation to supply determines the elements of scarcity. So scarcity is a
relative concept. For example, unemployment is due to scarcity of jobs.
Inflation is due to scarcity of goods. Unsold stock of inventory is due to
shortage of consumers etc.

2. Marginalism: When the resources are scarce managers have to be

careful about the utilisation of every additional resources. A decision about
additional investment has to be taken in the light of the additional return
from that investment. In economics the term “marginal” is used for all such
additional magnitudes of out put or return. For example, the terms like
marginal output of labour, marginal output of machines marginal return on
investment, marginal costs of production etc are used in economics. The
term ‘marginalism’ is not similar to the concept of average. For example
average product of labour is the ratio of total product to total labour
whereas marginal product of labour is the ratio of change in product to one
unit change in labour. The following table will illustrate the relationship
between average and marginal concepts is a symbol which denotes
change

When the average output decreases, the marginal output decreases steeper
than the average output such that marginal is lower than the average. When
the average output remains constant, the marginal output is equal to
average output. When the average output increases the marginal output
increases steeper than the average output such that the marginal exceeds
the average.

The marginal principles of economists are:

1. Each factor (labour) will be paid wages (W) according to its marginal
product (MP). WL = MP

2. Each commodity(x) will be priced (P) according to its marginal utility

(MU). Px = MUX

The basic idea is that satisfaction should balance sacrifice. In the real
business situation, it is difficult to apply the concept of marginalism. The
problem is of the margin. Variable may be supplied to many (group)
changes ‘rather than’ unit changes. In such cases the concept of
‘marginalism’ may be replaced by the concept of ‘incrementalism’. For
example the additional cost of installing computer facilities may be called
as ‘incremental costs’. Incrementalism is more wide whereas marginalism
is more specific. All marginal concepts are incremental concepts but all
incremental concepts need not be confined to marginal concepts alone.

3. Risk and Uncertainty: Many of the business decisions involve

future revenues and costs. But it is not possible to predict future
with great accuracy. Future involves changes and there is no
guarantee that the present will be repeated in future. The business
environment changes in course of time. All changes are not the
same. The changes may be known or unknown. The result of
known changes may be either definite or indefinite.
The definite result or outcome related with known changes is known
as “certainity”. The indefinite nature of outcome or result related
with known charges involves ‘risk’. Such risks can be estimated and
can be insured. On the other hand, if changes are unknown, their
outcome is indefinite the risk element is incalculable and
immeasurable. This is called as ‘Uncertainty’ and cannot be insured.
This is the difference between ‘risk’ and ‘uncertainty’, though these
two terms are used as synonyms in common parlance.
(eg) The interest rate is a risk premium where as profit is a reward
for uncertainty. With the help of statistical concept of probability,
the concept of risk and uncertainty is introduced in the analysis of
business decision making.
4. Profits: Profits means revenue minus costs, Revenue (TR) depends
on total quantity of sales (Q) and the price at which the output is
sold (P). The total cost (TC) depends on the number of factors
employed (F) and the average factor price (c). = TR – TC) can
be stated as Thus profits ( P.Q – C.F. Since profit is a
controversial subject, a distinction is made between business
(accounting) profit and economic profit. The businessman
calculates his return on investment (ROI) by calculating profit as a
percentage on investment. The various profit concepts such as
gross profit, net profit, profit after tax etc., are used depending on
 accounting convention and accounting convenience. The concept
of accounting profit is wider than that economic profit, because the
opportunity costs have to be deducted from accounting profit to get
economic profit. Opportunity cost refers to the costs of employing
self owned factors in the business.
For example, suppose a businessman uses his own capital, building,
labour in his business. If he rents out the same to some body’s
business he would have earned interests, rents and wages have to be
regarded as opportunity costs. Since it is very difficult to measure
opportunity cost, most of the economists assume zero opportunity
costs so that accounting profits and economic profits do not differ.
There are some more pure micro-economic concepts of profits.
Super normal profit (TR > TC) Normal profit (TR = TC) and
Subnormal profit (TR < TC) Normal profit refers to no profit - no
loss situation where as subnormal profit refers to loss.
5. Industry: Group of firms which produces similar commodity is
called an industry. The concept of an industry has been developed
to include firms, which are in some form of close relationship with
one another. These firms belonging to a group are behaviourly
interdependent. The concept of industry serves a lot of purposes. It
helps us to group the firms, makes it possible to predict the
behaviour of firms in the group that constitute industry, it provides
the framework for equilibrium price and output, helps the
businessmen in designing the tactics in view of the industry and
the government policy is designed with reference to industry; most
policies are industry-specific.
There are two criteria of industry classification:
(i) Product criterion: The firms are grouped in an industry if
their products are close substitutes.
(ii) Process Criterion: The firms are grouped in an industry on
the basis of similarity of processes – technology, use of raw
materials, methods of production, channels of distribution
etc.
6. Firm: A firm is defined as an organisation carrying on economic
activities like production, distribution and marketing of goods and
services with a view to earn profit. In traditional economic theory,
a firm is defined as an organisation of an individual or a group of
individual formed to achieve economic objectives. A firm in
modern period is defined as a joint stock company in which
decisions are taken by the shareholders and they are executed by
the Company Officers. Whether the firm is owned by an individual
or by group of persons, the goal is to make profit. Once this goal is
ensured, the next goal, namely, expansion of the firm comes into
existence. The traditional economists keeping profit maximization
as the goal of the firm, formulated a theory which is called
equilibrium of a firm. They said, that a firm is in equilibrium
position when it is earning maximum profits.
As regards the objectives of a firm, Prof.Galbraith in his book “The
Goals of Industrial System” says, ‘Any organisation, as for any
organism, the goal has a natural assumption of preeminence is the
survival of the organisation’. Survival here refers to obtain normal
earnings. Once a firm accomplishes this objective, it plans to expand
the activities of the firm, which means assuming more
responsibilities in the organisation. The goal of expansion is
followed by growth and then by technological development. This
means taking up of innovation. In course of time, a business firm
with a simple objective grows to a global institution with multiple
objectives.
7. The Market: Market in economics means, meeting place of buyers
and sellers directly or indirectly. Cournot, a French Economist
defines market as “Economists understand by the term market not
any particular market place in which things are bought and sold,
but the whole of any region in which buyers and sellers are in such
a free intercourse with each other that the prices of the same goods
tend to equality easily and quickly.” In the words of Jevons, “The
word market has been generalised so as to mean any body of
persons who are in intimate business relations and carry on
extensive transactions in any commodity.”
 Stonier and Hague explain the term market as, “any organisation
whereby buyers and sellers of a good are kept in close watch with
each other..... There is no need for a market to be in a single
building....... The only essential for a market is that all buyers and
sellers should be in constant touch with each other either because
they are in the same building or because they are able to talk to each
other by telephone at a moment’s notice.
8. Benham explains the term market as “and area which buyers and
sellers of a commodity are in close touch with each other either
directly or indirectly that the price obtainable in one part of the
market affects the prices paid in other part.” Ely observes, “market
means the general field within which the forces determining the
price of particular product operate.” If we study the above
definitions, we find that a market comprises of the following
components:
(a) Consumers: The buyers of the product are called consumers.
The buyers of a product are identified by means of income, need,
etc. If there are high income groups and they are concerned with
trade and commerce or higher government administration, they need
luxuries like motor cars, VCRs etc.
(b) Sellers: There should be manufacturers of a product in the
market. There must be industries manufacturing motor cars in a
country. They form sellers in the market.
(c) Commodity: A market means the buying and selling of a
commodity. If there is no commodity, the market will not exist. Each
commodity has a separate market, in the sense that every commodity
has a separate set of buyers and sellers.
(d) Price: If the commodity is to be bought and sold, there must be
a price for the product. The exchange of the product between buyers
and sellers take place at a place. Thus all the four components form
a market.
9. The managerial economists also perform the economic analysis for
a company. It belongs to the evaluation and feasibility of projects
taking place in the organization. For instance, a managerial
economist should have the ability to make judgments, keeping the
 cost-benefit analysis in mind for a company, and decide if the
project will be successful for an organization or not and whether
the organisations should continue with the project or not.
Economic analysis can be referred to the general business
environment, knowledge about competition, and foreign and
internal sales.
10. Security management analysis is one more function that a
managerial economist performs. This task is crucial for the
industries, which are security-oriented, such as nuclear plants and
power projects. The role and importance of security management
is to keep the secrets of the trading and production about
technology and other quality-related information that should not
get leaked. This role holds more importance in the projects, which
need strategies, are defense-oriented, and are of national
importance. A managerial economist needs to manage all these
security-related issues for these organizations.
11. Performing an advisory function is one of the roles of the
managerial economists. Being a part of this role, the economists
need to make decisions of various matters in trade and production.
For any organisations, managerial economists hold a position
higher than the top executive in the management team. The
managerial economists have responsibility to advise about all the
trades’ matters to the organization’s top executives as managerial
economists know the technical and financial aspects about the
actual functioning of trade within the organisations.

Check Your Progress-2

1. Discuss macro economics

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2. What is the role of firm ?

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1.6 FUNDAMENTAL PRINCIPLES OF MANAGERIAL

ECONOMICS

1.6.1 INCREMENTAL PRINCIPLE

Economists use the incremental principle in the theories of consumption,

production, pricing and distribution. Incremental concept is closely related
to marginal cost and marginal revenue in the theory of pricing. Incremental
cost involves estimating the impact of decision alternatives on cost and
revenue, emphasising the changes in the total cost and total revenue
resulting from changes in prices, products, procedures, investments, etc.
The two basic components of incremental principle are incremental cost
and incremental revenue. Incremental cost is the change in the total cost
as a result of new decision. The incremental principle is useful when the
firm wants to expand the production of a commodity. If the incremental
revenue is higher than incremental cost, then it is profitable for the
manager to expand the business. The moment the incremental revenue is
equal to incremental cost, the manager is required to stop further
expansion. Incremental principle is very much used in decision taking.

1.6.2 MARGINAL PRINCIPLE

According to this concept, a choice is considered rational and sound if,

given the company's goal of profit maximisation, it results in a rise in
profit, which is the case in either of the following two scenarios:

if overall revenue growth outpaces overall cost growth.

If overall cost decreases more than whole income.

Analyzing margins entails determining how a unit change in one variable
affects another. Small changes are typically referred to as marginal.
Changes in total revenue per unit of output sold are referred to as marginal
revenue changes. Changes in total costs per unit changes in output are
referred to as marginal costs (While incremental cost refers to change in
total costs due to change in total output).

The impact or change in marginal revenue and marginal cost that results
will determine whether a corporation decides to adjust the pricing. The
company should implement the pricing modification if the marginal
revenue is higher than the marginal cost.

Marginal analysis frequently results from a change in outputs or inputs,

whereas incremental analysis analyses the change in the firm's
performance for a specific managerial action. The marginal idea is
generalised by incremental analysis. It speaks about adjustments in cost
and revenue brought on by a change in policy. As an illustration, consider
adding a new company, purchasing additional inputs, processing products,
etc. Incremental change is defined as a change in output brought on by
modifications to a process, a product, or an investment.

1.6.3 TIM E PERSPECTIVE PRINCIPLE

This principle states that a manager or decision-maker should properly

emphasise the short- and long-term effects of his judgements by
appropriately weighing the various time periods before making a choice.
In the short run, some variables are fixed while others are subject to
change. By increasing the number of variable parameters, the productivity
can be boosted. While the long run is a time frame during which all
production elements are susceptible to change. It is simple for selling
enterprises to enter and exit. From the perspective of the consumer, the
short-run refers to the time period during which they react to price changes
based on their tastes and preferences, whereas the long-run refers to the
time period during which they have adequate time.

1.6.4 EQUI-MARGINAL PRINCIPLE

The benefit gained from consuming an additional unit of a commodity is

known as marginal utility. According to the laws of equal marginal utility,
a consumer will reach equilibrium when the marginal utilities of the
numerous goods he consumes are equal. Modern economists claim that
this concept has been articulated as a proportional marginal utility law.
According to this, the consumer will spend his income on a variety of
things so that the marginal utility of each is inversely correlated with the
price, i.e.,

MUx / Px = MUy / Py = MUz / Pz

where MU stands for marginal utility and P is the good's price.

Similar to this, a producer who seeks to maximise profit (or achieve

equilibrium) will employ a method of production that meets the criterion
below:

MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3

where MC stands for marginal cost and MRP stands for marginal revenue
product of inputs.

As a result, a manager can choose wisely by allocating or recruiting

resources in a way that balances the marginal returns and costs of multiple
uses of those resources for a particular use.

1.6.5 UTILITY ANALYSIS

Utility is a term used in economics to describe the value or worth of a good

or service. Utility is more exactly the overall satisfaction or benefit
obtained from using a good or service. It is a common assumption in
economic theories of rational choice that customers will attempt to
maximise their utility.

Understanding a good or service's economic utility is crucial since it has a

direct impact on its demand and, consequently, price. Consumer utility is
typically impossible to gauge or quantify in practise. However, some
economists think that by using several models, they can indirectly evaluate
the usefulness of an economic commodity or service.

From the idea of usefulness, economists derive the definition of utility. An

economic good is beneficial to the extent that it satisfies a consumer's need
or desire.

The term "utility" in economics was first used by renowned Swiss

mathematician Daniel Bernoulli in the 18th century.
1.6.6 CARDINAL UTILITY

Utility is viewed by economists like Bernoulli and others as a measurable

or fundamental characteristic of the economic commodities that a person
uses.

Economists use a unit called a "util" to represent the amount of

psychological satisfaction that a certain good or service creates for a subset
of people in different circumstances in order to aid in this quantitative
measurement of satisfaction

It is feasible to treat economic theory and relationships using mathematical

symbols and calculations because to the idea of a quantifiable util.

However, since "utils" cannot truly be viewed, measured, or compared

between various economic commodities or between individuals, it
distances the theory of economic utility from actual observation and
experience.

For instance, if someone determines that a bowl of pasta will provide 12

utils and a slice of pizza will provide 10, they will realise that the pasta
will provide a greater sense of satisfaction. Knowing that the average bowl
of pasta will produce two extra utils will allow the makers of pizza and
pasta charge pasta a little bit more than pizza.

In addition, utils may fall when the quantity of goods or services consumed
rises. The initial slice of pizza might produce 10 utils, but as more slices
are eaten, the utils might drop as people fill up. Consumers will learn how
to maximise their utility by spreading their budget across a variety of
goods and services, and businesses will learn how to set up tiered pricing
thanks to this process.

1.6.7 ORDINAL UTILITY

Early economists of the Spanish Scholastic school in the 1300s and 1400s
founded their theories on pricing and monetary exchanges and claimed
that the economic value of items directly derives from this quality of
usefulness.

This kind of framework was utilised by Austrian economist Carl Menger

to assist him answer the diamond-water problem, which had baffled many
earlier economists, in a breakthrough known as the marginal revolution.
This ordinal theory of utility is helpful for explaining the law of declining
marginal utility and basic economic principles of supply and demand
because the initial available units of any economic good will be devoted
to the most highly valued uses while succeeding units go to lower-valued
uses.

1.7 LET US SUM UP

• Managerial Economics is a broad field that encompasses a variety of

disciplines that have a direct influence on the achievement of goals set
by a firm.

• The managerial decision maker plays a vital function in the company

and is required to utilise all of the economics tools in order to analyse
the situations and alter the environment in a manner that is beneficial to
the company. The company's top priority should be to increase
shareholder wealth, and they should work to boost the share price on the
market.

• The primary goal of a company is to increase the value of the

organisation while simultaneously minimising any potential conflicts
with the shareholders. The shareholders and the managers have to come
to terms with the idea that ownership and management are two
independent entities.

• It is the full responsibility of the management to ensure that the

organization's goals, which are aligned with the interests of the
shareholders, are met. The particular advantages and disadvantages of
individual businesses are what guide the activities of management.
These principles help define the scope of management economics and
provide assistance in making crucial decisions for a company's
operations.

• In recent years, managerial economics has experienced significant

expansion, and as a result, the demand for this field has increased.
Managerial economists play a very important function in companies,
which includes making judgements, projecting prices, and providing
senior executives with a variety of options to choose from in order to
assist them in making decisions that are beneficial to the company as a
whole.

• Demand theory, the theory of the cost and production theory,

competition theory, and price theory are the several economic theories
that are utilised in managerial economics. The field operates under the
assumption that all individual actors are logical. In a variety of settings,
including as a component of demand schedules, demand curves, and
demand quantities, the term "demand" is employed.

• It is important to have an understanding of the many situations in

which these terms can be used. According to the law of demand, there
is an indirect relationship between price and the quantity of an item that
consumers want. Using the indifference curve, one can ascertain the
nature of the indirect relationship that exists between the cost and the
quantity in demand. There are two elements that have an impact on the
Law of Demand: the income effect and the substitution effect. Utility
can be understood in a variety of ways, including initial utility, marginal
utility, and total utility. Both the law of equip-marginal utility and the
law of declining marginal utility belong to the category of laws
pertaining to utility.

1.8 KEY WORDS

 The ratio of the total number of units of output to the total number
of units of an input; the ratio of the total dollars in revenue or profit
to the total number of units of an input.
 A business is any entity, whether for profit or not, that is engaged
in the production of goods and services with the purpose of selling
them to consumers or other businesses.
 Cap and trade is a method for regulating glasshouse gas emissions
in which companies are granted the right to emit a predetermined
amount of pollutants and then have the option of selling those
rights to another company.
  Capacity, which refers to the volume of output at which the average
cost is at its lowest value;
 Capture theory of regulation: a postulate that government
regulation is actually executed to improve conditions for the parties
being regulated and not necessarily to promote the public interest
in reducing market failure and inefficiency. Specifically, the theory
posits that government regulation is executed to improve
conditions for the parties that are being regulated.

1.9 ANSWER TO CHECK YOUR PROGRESS

1.10 SOME USEFUL BOOKS

 Managerial Economics by Homes& Maurice, Tata

McGraw Hill, 8th Edition
 Indian Economy by Mishra & Puri theEdition ,
Himalaya Publishing ,24 House
 Managerial Economics by Analysis, Problems &
Cases , P.L Mehta, Sultan Chand Sons , New Delhi
 Managerial Economics by Varshney &
Maheshweshari ,

1.10 TERMINAL QUESTIONS

A. Descriptive Questions

Short Questions

1. Give an explanation of the significance of management economics.

2. What are some of the distinguishing features of managerial economics?

3. Identify an application of managerial economics and have a discussion

about it.

4. Can you explain some of the fundamental ideas behind managerial

economics?

5. What constitutes the characteristics of managerial economics?

Long Questions

1. What are the different kinds of economies? Can you go into detail about
the many types of economies?

2. Describe how the economy works in a circular fashion.

3. Could you briefly discuss the philosophy of firms?

4. Explain the function that managerial economics plays in the business

world.

5. Please explain the following terms: a. incrementation b. opportunity cost

c. time perspective d. discounting principle e. marginalism

B. Multiple Choice Questions

1. In the field of business economics, the word "opportunity cost" can also
be referred to as a. alternative cost b. social cost c. lost cost d. best cost 1.

2. Which of the following concepts best describes the transformation that

takes place when an organization's policies are revised?

a. Marginal b. Absolute c. Arbitrary d. Incremental

3. The field of microeconomics is the subfield of economics that focuses

on which of the following subject areas?

a. The actions of individual consumers, as well as those of businesses and

investors. b. The actions of individual consumers.
b. The unemployment rate in conjunction with interest rate

d. The actions taken by individual companies and investors

4. The ______ evaluates how a decision will have an impact, first on time
and then on cost and revenue.

a. The concept of incremental growth. b. The idea of marginal growth. c.

The cost of missed opportunities. d. The concept of marginal revenue.

5. The equi-marginal concept is appropriate for a. firms with limited

resources b. firms with limitless resources c. firms with dominant positions
d. new firms

Answer

1.a 2.d 3.a 4.a 5.d