COURSE

Rudimentary Principles and Practices

of Managerial Economics
Module 1
Lecture No.: 1 Managerial Economics and Economist

S.No Topics to be covered under Managerial Economics and Economist

1 Introduction to Economics
2 Indian Perspective of Economics
3 Microeconomics & Macroeconomics
4 Concept and Definition of Managerial Economics
5 Characteristics of Managerial Economics
 Introduction to Economics
When a learner starts studying a subject, their natural interest is to learn about its
nature, scope, and its practical application in day-to-day life. But an economics
student is keenly interested in knowing all dimensions and complications of
economics from micro to macro and its further divisions and its relation with other
disciplines.

From the ancient period, India has deep connection with economics. Modern
economists have attempted to understand and describe economics in a lucid and
simple way, but they have not been able to come up to a consensus which is
accepted by all school of thoughts. Economic experts have defined economics
variably throughout history, from Indian to western culture i.e. from Chanakya to
Adam Smith. Indian knowledge system is completely imprinted with different
concepts of economics and its application.
 …Continued
Economics is a social science that analyses how products and services are
produced, distributed, and consumed. Economics studies how decisions are
made by the people, organisations, governments, and countries to make
optimum utilisation of scarce resources.
According to Dr. Alfred Marshall, one of the finest economists of the nineteenth
century says, “Economics is a study of man’s actions in the ordinary business of
life: it enquires how he gets his income and how he uses it.” As a result, it is both
the study of money on the one hand and, more importantly, the study of man on
the other.
According to Professor Lionel Robbins, “Economics is the science which studies
human behaviour as a relationship between ends and scarce means which have
alternative uses."
Different Stages of Developing Economics as a Subject

Based on
Based on
Wealth Centred
Welfare Centred
(Adam Smith,
J.B. Say, (Marshal, Pigou
etc.)
J.S. Mill etc.)
Different
School of
Based on thoughts
Growth Based on
Centred Scarcity
(Samuelson, Centred
Henry Smith (Robbins)
etc.
 Indian Perspective of Economics
Kautilya Economics focuses on the relationship between wealth and ethics. It also
advocates that wealth should be accumulated through purely ethical sources and
righteous ways only. It firmly believes that business communication should be
considered the most essential aspect for economic stability and growth. It is of the
strong opinion that economics comes with values and ethics , therefore the concept
focuses on the concept of ethical economy by sticking to the roots of the society.
On the other hand, Mahavira’s principle of economics is based on the welfare of
mankind. The thought process did not completely rejected materialism but tried to
bring out difference between spiritualism and materialism.
To summarize the Indian School of thought related to economics was purely focused
towards holistic development of the society and inclusive growth.
 Micro Economics and Macro Economics

The two main subfields of economics as a social science are Microeconomics and
Macroeconomics.

Microeconomics
It studies the behaviour Macroeconomics
of individual units of an
economy It studies the behaviour of
aggregates of the economy
as a whole
 …Continued
❑ Microeconomics: It is the study of how different economic entities
individuals, households, businesses, and industries make their economic
decisions. Microeconomics critically deals with the rationality of consumer’s
making best utilisation of scarce resources for meeting their unlimited wants
to derive maximum satisfaction and economic welfare.
❑ Macroeconomics: It is the branch of economics that studies the behaviour of
an overall economy. It works with the aggregates, such as total investment,
total production, total employment, price level, national income, inflation,
rate of economic growth, gross domestic product (GDP), government policies
(fiscal and monetary policies). Therefore, aggregation of microeconomics is
macroeconomics.
Difference between Micro Economics and Macro Economics

Basis Micro –Economics Macro-Economics

Concept The focus on economic behaviour of The focus is on aggregate or total such
individuals units such as person, as national income, total consumption
household or firm and saving.
Objective The main objective is to analyse The objective is to study the problems
problems and policies related to and policies related to full
optimum utilisation of resources. employment of the resources and
growth of it.
Scope It covers the scope of consumer’s It covers the scope of equilibrium level
equilibrium, factor economics and of national income and employment
welfare economics. trade cycle.
Concept and Definition of Managerial Economics
Business Economics comprises of two words- business and economics. Business means
continuation of an economic activity with the object of earning profit, whereas
economics deals with theories, principles, concepts that is universally acceptable. So,
business economics is the recent branch of economics which makes practical
application of theories of economics in real world of business i.e. uncertain and
unpredictable. Business economics acts as a bridge between the theories of economics
and its practical application for decision making in business world. The other name of
business economics is managerial economics.
Managerial economics is the application of rational analysis to solve business
challenges and problems such as demand, cost, production, marketing, future planning
etc. for smooth flow of business. The main motive of managerial economics is to solve
practical issues that may arise in management of business and helps the managers' to
take logical decisions. This branch of knowledge is also known as Theory of firm,
Economics of enterprise etc.
 …Continued
As per Spencer and Siegelman, “Managerial Economics is the integration of economic theory
with business practice for the purpose of facilitating decision-making and forward planning by
management.”
According to Malcolm P. McNair and Richard S. Meriam, “Managerial economics consists of
the use of economic models of thoughts to analyse business situations.”
In the words of Bates and Parkinson, “Managerial Economics is a study of the behaviour of a
firm in theory and practice.”
As per Edwin Mansfield, “Managerial Economics is concerned with application of economic
concepts and economic analysis to the problems of formulating rational managerial
decisions.”
In short, we can summarise it as, “Managerial Economics primarily involves application of
economic principles, methods, and analytical tools to the decision-making process within a
business or firm. It seamlessly integrates economic theory with the operational aspects of
firms or organizations.”
 Characteristics of Managerial Economics
❑ The study of managerial economics focuses on the investigation of
identifying the best answers to business and corporate decision-making
issues such as estimating product demand, figuring out manufacturing costs,
setting prices, profit planning, etc. (microeconomic in nature).
❑ Managerial economics is pragmatic in nature i.e., based on real experiences
and cases.
❑ Managerial economics is the practical application of economic ideas,
theories, and principles to managerial problems (applied economics).
❑ Managerial economics is a normative science as it provides solution to the
problems.
 …Continued
❑ Managerial Economics primarily deals with making value judgments centered
around what should be done. It evaluates every decision made by a firm by
considering its positive and negative effects. This implies that the firm will only
make choices that benefits it and will avoid those that could work against it.
❑ The basic economic concepts and principles form the foundation of managerial
economics.
❑ Managerial economics is both a science and an art.
❑ The study of managerial economics is more prescriptive than descriptive. It offers
recommendations as to ‘what to do’ and ‘what not to do’ for fixing different
business issues and challenges.
❑ The study of managerial economics is interdisciplinary in nature. It incorporates
ideas from several disciplines, such as behavioural sciences, mathematics,
statistics, economics, management etc.
Solution to Business Problems
Decision Problem

Traditional Managerial Decision

Economics Economics Science

Providing optimal solution to problems of

business
THANK YOU
 COURSE
Rudimentary Principles and Practices
of Managerial Economics
Module: 1
Lecture No.: 2 Managerial Economics and Economist

S.No Topics to be covered under Managerial Economics and Economist

1 Nature of Managerial Economics
2 Difference between Economics and Managerial Economics
3 Scope of Managerial Economics
4 Importance of Managerial Economics
 Nature of Managerial Economics

MANAGERIAL
SCIENCE ART
ECONOMICS

The nature of any subject depicts that it is a science or an art or both, and
again if it is a science then it is positive science or normative science.
 Managerial Economics as a Science
The nature of any subject depicts that it is a science or an art or both, and again if it is a
science then it is positive science or normative science.
As a Science: Science comprises of four important characteristics i.e., (i) systematic study
of facts. (ii) specific rules, theories, and principles. (iii) cause and effect relationship. (iv)
universal acceptability. Managerial economics also includes a systematic analysis and
study of facts as it has various principles and theories which are characterised by cause-
and-effect relationship i.e., universally accepted. Managerial economics is a social science
rather than pure science because it deals with human beings and their behaviour.
Therefore, there is no doubt that it is a science but the question is whether it is positive
science or normative science. Positive science talks about ‘what is?’ whereas normative
science focuses on ‘what should be’? Managerial economics deals with solution to the
problem rather than focusing on the cause of the problem because it is prescriptive in
nature and not descriptive. That is why, managerial economics comes under the category
of normative science because it analyses and explains a firm's economic problems and
makes recommendations for potential solutions.
 Managerial Economics as an Art
As an Art: Science provides theoretical knowledge whereas art is the creative
application of knowledge for solving practical problems in real world. Art teaches
us to perform a work in an effective manner because it answers the questions of
‘how?’ Both art and science complement each other and goes side by side for
successful results. This nature of managerial economics differentiates economics
from managerial economics because it provides solutions to the problems in
unpredictable world. It can be minimised to some level through effective creativity
of a manager by deciding the best theories at a time for desirable results. A
managerial economist must be skilled at making the most use of his abilities, skills,
and knowledge to accomplish organisational goals. Thus, it is evident that
managerial economics is also an art.
It may be concluded that managerial economics is the ultimate combination of
normative science and art.
Difference between Economics and Managerial Economics

S. No. Basis Economics Managerial Economics

1 Meaning It deals with the framing of Managerial economics deals with the
economic principles and theories application of economic principles and
to solve economic problems. theories to solve economic problems.

2 Scope It is broader in scope as it includes Managerial economics is narrower in

both microeconomics and scope as it deals only with
macroeconomics. microeconomics.
3 Science Economics is both normative and Managerial economics is only normative
positive science. science.
4 Theory and It covers only the theories of It covers economic theories and their
practices economics. practical applications.
 …Continued
5. Economic and Economics basically deals Managerial economics deals with both
non- economic with the economic aspects. economic and non- economic aspect of
aspects business.
6. Origin Economics has its existence Managerial economics is relatively a modern
since ancient times. concept derived from economics itself.

7. Knowledge of Economics generally does Managerial economics is multi-disciplinary

other subjects not involve the knowledge subject which requires knowledge of other
of other subjects as it is a subjects such as accounting, statistics,
theoretical concept. mathematics, economics etc. for practical
application of theoretical knowledge.
8. Assumptions Economic theories are In Managerial economics, most of the
based on assumptions that assumptions get violated due to practical
are applicable only when applicability of theories in uncertain
the situations are constant. situations.
 …Continued
9. Nature Economics is descriptive in Managerial economics is
nature. prescriptive in nature.
10. Decision Economics is basically concerned Managerial economics is mainly
making with the framing of concepts of concerned for decision making for
knowledge and principles. the business through the
knowledge of economics.

11. Branches Economics involves Managerial Managerial economics itself is an

economics as its applied branch. applied branch of economics.

12. Theory of firm Economics deals with the Managerial economics deals only
theories of production, with the profit theory of firm.
consumption, and distribution.
 Scope of Managerial Economics
Managerial economics provides management with a vital strategic tool to understand
the dynamics of the business world and sustain profitability in a constantly evolving
landscape. It primarily deals with implementing economic theories and principles across
various business entities. Following aspects are included in the scope of the managerial
economics:

❑ Demand Analysis and Forecasting: Every business's primary goal is to generate sales of
its product, ultimately resulting in profits. Therefore, the decisions made by business
managers are primarily influenced by demand and sales forecasts. Starting off with an
analysis and pre-determination of demand is crucial for making sound business
decisions. This involves examining concepts such as the law of demand, demand
elasticity, factors that influence demand, various types of demand, and methods for
forecasting demand accurately. Additionally, selecting an appropriate forecasting
method is crucial for anticipating future market trends effectively.
 …Continued
❑ Production and Cost Analysis: Generally, firms are associated with production
of specific goods and services. Efficient management of production and cost
control leads to adequate profit. The decision-making process on production
follows the evaluation of demand. Businesses must tackle questions like the
ideal location for their operations, determining production quantities in the
short and long term, and the optimal scale of production. Production analysis is
conducted in physical units, whereas cost analysis is in monetary terms. The
focus of cost analysis is broader than production analysis, as it aids in
establishing the company's size, output volume, and factor proportions. It
involves the study of costing and its classification, cost and production relation,
PERT, CPM, CVP analysis, law of production, economies and diseconomies of
scale etc.
 …Continued
❑ Price Analysis: Decisions related to pricing policy and application is an important
part of managerial economics. A firm operates to make a profit. The market
growth and success of a business rely on profitable pricing decisions. Theories
about price determination under different market conditions allow a firm to solve
pricing issues. The manager must establish appropriate pricing policies for short-
term and long-term production. The price analysis comprises price policy, price
decision, price discrimination and price forecasting in various competitive stages.
❑ Profit Management: Earning profit is one of the key focus in managerial
economics. A firm is created to generate profit, and profit levels are the main
measures of firm’s achievement. Profit refers to the difference between what a
company puts in and what it gets out i.e., Sales- Cost of Production. Profit
management is a wider scope of managerial economics as it includes various
theories of profit, methods of calculating profits, profit planning and forecasting,
profit policy etc.
 …Continued

❑ Capital Management: Capital, like all other resources, is limited and

expensive. Efficient allocation and management of capital is one of the most
critical responsibilities of managers. Businesses need to invest capital in
things like facilities, equipment and infrastructure (i.e., plant, machinery,
building, furniture etc.) Decisions about capital investments involve large
sums of money and usually require considering the long-term timeframe, as
these assets are meant to be productive over many years. This decision
includes cost of capital, choice of investment proposals, rate of return,
capital budgeting etc.
 Importance of Managerial Economics

❑Estimating Economic Relationships: It estimates economic relationship between

relevant factors like income, elasticity of demand, cost volume profit etc.

❑Prediction of Economic Quantity: It helps in predicting of economic quantities like

cost, demand, production, price etc. The manager who works in the scenario of
uncertainty so he makes an attempt to predict considering different factors.

❑Basis for Policy of Business: Managerial economics is considered an important

barometer for business policies. Different policies are prepared considering the
findings and studies being conducted
THANK YOU
 COURSE
Rudimentary Principles and Practices
of Managerial Economics
Managerial
Module 1Economics
Lecture No.: 3 Managerial Economics and Economist

S.No Topics to be covered under Managerial Economics and Economist

1 Significance of Managerial Economics
2 Relation of Managerial Economics with other Subjects
3 Methodology of Managerial Economics
4 Decision Making in Business
 Significance of Managerial Economics

Market Economic
Decision Making
Research Intelligence

Risk and
Co-ordination
Uncertainty

Business
External Forces
Model Building
 Significance of Managerial Economics
The ideas and application of economics are mediated by managerial economics in
which the issues are identified, data is arranged to assists managers in resolving
business issues and improving the decision-making process. The significance of
managerial economics can be highlighted as under:
❑ Decision Making: Managerial economics focuses on applying traditional economic
principles to real-world problems. These principles are modified to help managers so
as to make better decisions by which the available resources or funds are efficiently
used for achieving a set of goals.
❑ Co-ordination: Managerial economics serves as the bridge between economic
theories and its practical applications. It aids in determining how sound and strong
economic principles can be implemented and adjusted to align with corporate
requirements.
 …Continued
❑ Risk and Uncertainty: The domains of managerial economics assists an individual to
reduce the degree of risk and uncertainty involved within the environment of
business in advance.
❑ External Forces: Managerial economics plays a crucial role in assessing the level of
risk and the extent of uncertainty associated with external economic factors,
including national income, trade cycle, employment, foreign trade, inflation, and
more. This analysis aids in minimizing risks and effectively planning for unpredictable
circumstances.
❑ Business Model Building: The methodology of managerial economics (such as
deductive method, inductive method, case study method, econometric methods)
builds an entrepreneur ability in an individual for actual application of knowledge in
the real world of business.
 …Continued

❑ Market Research: Managerial economics helps manager in thorough examination of

market trends to establish price of product and pattern of production decision of
competitors. This analyses helps manager to take decision related to what, when, how
and for whom to produce goods. It helps in analyzing national and international market,
which aids in identifying niche market segment and facilitates worldwide expansion of
the firm that eventually, lowers the cost of production this will ultimately maximize
profit for the firm.
❑ Economic Intelligence: External variables that impact an organization's ability to
operate efficiently include exchange rates, product cycle phases, job opportunities,
government policies, emerging market trends and market trends. To comprehend these
aspect’s influence on the organization, a thorough study and analysis are necessary.
Managerial economics update the management with the recent data and latest
approaches .
Relation of Managerial Economics with other Subjects

ACCOUNTIN
G

MANAGERIAL
ECONOMICS MATHEMATICS
ECONOMICS

STATISTICS
Relation of Managerial Economics with other Subjects
Managerial Economics has emerged as an interdisciplinary field, owing its development
and progress from diverse stream of knowledge over the course of several decades. The
nature and scope of managerial economics can also be understood well by studying its
relationship with other disciplines such as economics, statistics, mathematics, operational
research, accounting etc.
❑ Managerial Economics and Economics: Managerial Economics is commonly defined as
the application of economic principles for decision-making. It serves as an important link
between economic theories and the decisions made by managers. Managerial Economics
is built upon the principles, analysis, and methodologies of microeconomics. The key
concepts of microeconomics includes topic such as elasticity of demand, production
elasticity, demand forecasting, marketing strategies, production functions, which plays a
crucial role in the field of managerial economics. As a result, it is widely acknowledged
that the origin of managerial economics can be traced back to microeconomic theories.
 …Continued

❑ Managerial Economics and Statistics: Managerial economics, a subset of

economics, deals with quantifiable variables. The application of statistics in this
field is vital for decision-making as it involves various statistical techniques such as
interpolation, extrapolation, time series, probability, price index etc. Thus,
statistical methods are crucial for managerial economics.
❑ Managerial Economics and Mathematics: Managerial Economics is closely
related with the subject Mathematics. Proficiency in mathematical concepts such
as geometry, calculus, and matrix-algebra are not only crucial but also
indispensable for managerial economists. Additionally, mathematical tools like
logarithms, exponentials, and vectors serve as essential toolkits for these
professionals.
 …Continued
❑ Managerial Economics and Accounting: Accounting primarily deals with the
systematic recording of financial reports for business firms. In fact, accounting
information is a fundamental source of data required by a managerial
economist for decision-making purposes. For instance, a firm's profit and loss
account reveals its performance, and a managerial economist can use this
information to assess the current economic performance of the firm and plan
for the future. Various management accounting and finance tools such as
capital budgeting, cost of capital, ratio analysis, marginal costing etc are widely
used by modern managerial economists.
Methodology of Managerial Economics

Deductive Method

Inductive Method

Case Study Method

Econometric Method
 Methodology of Managerial Economics

The various methodology of managerial economics are as follows:

❑ Deductive Method: This approach involves commencing the study with the
acceptance of factual information or basic facts, and subsequently reaching a
definitive conclusion through the application of logical reasoning and analytical skills.
In this method, a hypothesis is formulated based on specific assumptions and
experiments. This approach is simple, clear, precise, universal and unbiased. Deductive
reasoning denotes from general premises to specific conclusion.
❑ Inductive Method: The inductive method is the complete opposite of the deductive
method. It seeks to discover general truths by starting with specific truths, moving
from the general to the particular. For instance, Ashita, Anika, Dhriti and Sharanya, all
tend to purchase more commodities when prices fall. This observation serves as a
base for specific truth. Inductive reasoning denotes drawing conclusion from specific
to general.
 Inductive Vs Deductive Method

Inductive Method Deductive Method

It moves from Specific It moves from General Rule to
observation to General Rule. Specific Observation.
 …Continued
❑ Case Study Method: The case study method was developed by a Professor at Harvard
Business School in the United States; hence it is commonly referred to as the 'Harvard
Approach'. This approach emphasizes less on traditional lecture-style teaching and put
greater emphasis on active participation of students in the classroom. Students are
presented with real or hypothetical business cases and they are encouraged for group
discussion so as to arrive at conclusion. The main method of this category is plenary
session, syndicate discussion, role playing and individual exercise.
❑ Econometric Method: Econometrics involves the application of statistical and
mathematical models to formulate theories or to examine the existing hypotheses in
economics. It also aims to predict future trends by analysing historical data. It involves
analysing real-world data through statistical experiments and then contrasting the
outcomes with the theory under examination. In the field of econometrics, endeavours
are undertaken to determine the most optimal decision using mathematical and
quantitative methods. Linear programming, game theory, PERT, and CPM are some of
the tools that assist in this process.
 Decision Making in Business
Decision making is basically concerned with choosing between different alternatives.
The manager has to select the best alternatives which can contribute in a positive
way towards the firm. The manager tries to get maximum or best return from the
available resources.
In words of Fayol and Urwick, “Decision making is a process to the extent that if
effects delegation and authority.”
In words of F.W. Taylor, “ It is scientific method only as an ideal approach to making
decisions.”
According to Chester Bernanrd, “The process of decision making are
comprehensively techniques of narrowing the choices.”
Decision making in management system is a process whereby the manager
selects the best course of action from the available alternatives. The decision is
taken in such manner that it can serve the objectives of the firm
 Important Components of Decision Making

Selecting the best

Identifying the feasible alternative
alternatives available according to the
requirement.
THANK YOU
 COURSE
Rudimentary Principles and Practices
of Managerial Economics
Module 1
Lecture No.: 04 Managerial Economics and Economist

S.No Topic to be covered under Managerial Economics and Economist

1 Features of Decision Making
2 Role of Managerial Economics
3 Responsibilities of Managerial Economist
Features of Decision Making

Goal Oriented

Different Alternatives

Free to Choose
Judgmental or Emotional
Basis
Continuous Process
 Features of Decision Making
❑ Goal Oriented: The decision making process should be goal oriented, which
means the manager should take such decisions which could cover the desired
goals of the firm.
❑ Different Alternatives: The decision should be taken from the different
alternatives available to solve the problems of the firm.
❑ Free to Choose: The decision maker must have freedom to choose from the
available alternatives without any pressure or bias.
❑ Judgmental or Emotional Basis: It is not mandatory the decision take should be
always rational basis it may be judgmental or emotional basis in which personal
preference might be given priority.
❑ Continuous Process: Decision making is a continuous process. In all dimensions
of firm decision making plays a vital role.
 Managerial Economist and its Role
Managerial economists have become increasingly significant in the modern business
landscape. They assist managers for formulating various strategic plans and achieving
pre-determined targets of business. A managerial economist is the one who holds a
respected position within an organization as he possesses a strong theoretical
background and analytical skills. By leveraging their expertise in business economics,
they offer valuable insights to top-level management from an economic standpoint.
The primary responsibility of a managerial economist is not to make decisions, but to
analyze, draw conclusions, and provide recommendations to policymakers. It is
essential for them to have the autonomy to conduct thorough analyses and possess a
comprehensive understanding of the relevant facts.
Role of Managerial Economist

Analysis of External Factors

Analysis of Internal Factors

Provide Economic Intelligence

Specific Functions
 Role of Managerial Economist
One might imagine a firm as a boat in an unpredictable ocean. The risk of sinking
exists at all times if the sailor (business economist) of the boat is inexperienced or
underqualified. By providing accurate predictions at the right time, a business
economist helps managers become aware of the uncertainties that exist in business
world. The primary duty of a business economist is to identify internal and external
factors and provide management with recommendations regarding their impact and
effect so that the right decisions can be made.
❑ Analysis of External Factors: Managers have no control over external elements,
which are referred to as the "business environment." While external factors cannot
be altered, management decisions can be adjusted accordingly. Key external factors
include the trade cycle, national income, employment, government policy, and
international business trends. The managerial economist offers precise and timely
information to managers to enhance the effectiveness of decision-making and future
planning.
 …Continued
❑ Analysis of Internal Factors: Internal factors are managed by the managers as these
tasks are carried out within the firm, also known as "business operations". The
responsibilities of a managerial economist in decision-making involve routine tasks such
as setting prices, enhancing quality, selecting plant locations, and adjusting production
levels. The managerial economist's role in internal management encompasses various
aspects of the firm's production, sales, pricing and inventory planning. Managerial
economist give suggestion to top level management related to internal factors.

❑ Provide Economic Intelligence: The business economists offer managers valuable

insights into various aspects of economics, including competitive pricing, tax rates, and
import-export duties. These professionals provide relevant information based on their
expertise and knowledge in the field. However, it is the managerial economist within
each organization who plays a crucial role in advising managers on all trade-related
matters. With their comprehensive understanding of the unit's operations, both
technical and financial, they are well-equipped to provide guidance and support.
 …Continued
❑ Specific Functions: A business economist is also responsible for carrying out
specific tasks for managers, government officials, financial institutions, and other
entities. They are required to offer their expert assistance on a range of matters as
requested by the respective authorities.
The common function in this category are:
❑ Market research.
❑ Sales forecasting.
❑ Analysis of capital projects.
❑ Advice on foreign exchange.
❑ Suggestion on public relationship.
 Responsibilities of Managerial Economist

Accurate Reasonable Profit

Business Plan and on Capital Wide Contacts
Forecast Employed

To Inform the To Make the Status

Economic
Management for Respectable in the
Intelligence Firm
Errors
 Responsibilities of Managerial Economist
A Business economist plays a crucial role in contemporary business operations. By
utilizing their skills and techniques, they assist the management of a company in
making informed decisions and engaging in forward planning. The role of a business
economist encompasses that of a business analyst and advisor, making it an integral
component of modern business activities.
❑ Accurate Business Plan and Forecast: The business economists play a crucial role in
assisting management with the development of their business plan through forecasting
the economic environment. This enables management to make informed decisions
regarding the timing and location of their specific actions. By interpreting national
economic trends and industrial outlook, the business economist provides relevant
insights to the firm. Through concise and practical advice, the business economist
guides top management. In a partially controlled economy such as India, the business
economist translates government intentions into business terms and conveys industry
reactions to suggest changes in government policy.
 …Continued
❑ Reasonable Profit on Capital Employed: The primary goal of every business is
to earn a profit. It is the duty of a business economist to contribute to
enhancing the profit-making ability of the organization. Nowadays, excessive
profits can lead to various issues such as criticisms, government restrictions,
and regulations. Therefore, it is essential to focus on appropriate profits rather
than excessive ones. Business economists should offer their services with the
aim of achieving appropriate profit objectives.
❑ Wide Contacts: A business economist must possess an extensive network of
connections in order to promptly deliver valuable economic insights to
managers. It is crucial for them to actively participate in both business and
social committees. Their effectiveness is gauged by their ability to swiftly
acquire essential, intricate, and confidential information.
 …Continued
❑ Economic Intelligence: The business economist offers general intelligence services to
the management by providing economic information of general interest, enabling
them to engage in meaningful discussions during conferences and seminars.
Additionally, the business economist gathers the necessary facts and figures to assist
in preparing the firm's annual reports. These data are meticulously collected by the
business economist, who possesses a deep understanding of the literature related to
business activities.
❑ To Inform the Management for Errors: It is imperative for the business economist to
promptly notify the manager of any identified errors. This will enable the manager to
rectify any mistakes in the decision-making process. A business economist must not
delay in communicating any errors and should work closely with managers to correct
them swiftly. Failure to address errors promptly may compromise the accuracy of
future decisions in the long term.
 …Continued
❑ To Make the Status Respectable in the Firm: A Business Economist plays a
crucial role in decision-making and strategic planning within a company. In
order to effectively contribute to the business team, the economist must
demonstrate the ability to communicate clearly and ensure that his
recommendations are well-received. Additionally, the economist should be
willing to take on special projects and stay informed about industry trends
while maintaining a national perspective. It is evident that Business
Economists can establish themselves as valuable members of the
management team by fulfilling their duties diligently.
THANK YOU
 COURSE
Rudimentary Principles and Practices
of Managerial Economics
Module 1
Lecture No.: 5 Managerial Economics and Economist

S.No Topics to be covered under Managerial Economics and Economist

1 Objectives of the Firm
2 Profit Maximization Objectives of the Firm
3 Wealth Maximization Objectives of the Firm
 Objectives of the Firm

Profit Objectives of Wealth

Maximization the Firm Maximization
Profit Maximization Objectives of the Firm
Financial Performance

Efficiency

Competitive Advantage

Risk Management

Long-Term Sustainability

Resource Allocation

Stakeholder Interests
 Profit Maximization Objectives of the Firm
Profit maximization is a traditional and widely recognized objective of firms,
particularly in economics and finance. It entails the process of maximizing the
difference between total revenue and total cost, resulting in the highest possible level
of profit.

Here are some key points about profit maximization as an objective of a firm:
❑ Financial Performance: Profit maximization focuses on achieving the highest level of
financial performance by generating as much profit as possible from the firm's
operations. This allows the firm to increase shareholder value, attract investors, and
secure financing for growth and expansion.
❑ Efficiency: Pursuing profit maximization encourages firms to operate efficiently by
minimizing costs and maximizing revenue. This can involve optimizing production
processes, controlling expenses, and pricing products or services to maximize profit
margins.
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❑ Competitive Advantage: Firms that consistently maximize profits are often better
positioned to compete effectively in the marketplace. They can invest in research and
development, marketing, and other initiatives to differentiate their products or services
and maintain a competitive edge.

❑ Risk Management: Profit maximization involves assessing and managing risks to ensure
that the firm's profitability is not unduly jeopardized. This may include diversifying
revenue streams, hedging against market fluctuations, and maintaining adequate
liquidity to weather economic downturns.

❑ Long-Term Sustainability: While profit maximization primarily focuses on short-term

profitability, it also considers the long-term sustainability of the firm. Sustainable
profitability ensures the firm's viability and ability to continue generating returns for
shareholders over time.
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❑ Resource Allocation: Profit-maximizing firms allocate resources in a manner that
maximizes profitability. This includes investing in projects or activities with the highest
expected return on investment and divesting from those that are less profitable or
unprofitable.
❑ Stakeholder Interests: Profit maximization serves the interests of various stakeholders,
including shareholders, employees, suppliers, and customers. By maximizing profits,
firms can reward shareholders with dividends, provide competitive wages and benefits
to employees, and invest in product quality and customer satisfaction.
Overall, profit maximization remains a fundamental objective for many firms, as it
provides a clear and quantifiable measure of financial success and guides decision-
making across various functional areas of the organization. However, it's essential to
recognize that profit maximization is not the sole objective of all firms and must be
balanced with other considerations, such as social responsibility, sustainability, and
long-term value creation.
Criticisms of Profit Maximization
Short-Term Focus

Neglect of Stakeholder Interests

Economic Inefficiency

Focus on Financial Metrics

Social and Environmental Externalities

Ethical Concerns

Lack of Innovation
 Criticism of Profit Maximization
Criticism of profit maximization as the primary objective of firms stems from various
perspectives, including ethical, social, and economic considerations. Here are some
common criticisms:
❑ Short-Term Focus: Profit maximization often encourages firms to prioritize short-term
gains over long-term sustainability. This can lead to decisions that prioritize immediate
profits at the expense of long-term investments in innovation, research and
development, employee training, and infrastructure development.
❑ Neglect of Stakeholder Interests: Focusing solely on maximizing profits may neglect the
interests of other stakeholders, including employees, customers, suppliers and the
broader community. For example, cost-cutting measures such as layoffs or reduced
wages may negatively impact employee well-being, while pricing strategies aimed solely
at maximizing profits may exploit consumers or suppliers.
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❑ Social and Environmental Externalities: Profit maximization may lead firms to
prioritize financial gains without adequately considering the social and
environmental externalities of their operations. This can result in negative impacts
such as pollution, resource depletion, and social inequalities, which are not
accounted for in traditional profit calculations.

❑ Focus on Financial Metrics: Relying solely on financial metrics such as profit

margins and return on investment may overlook other dimensions of value
creation, such as social impact, customer satisfaction, employee well-being, and
environmental sustainability. This narrow focus may not capture the full range of
factors that contribute to long-term business success.
❑ Lack of Innovation: Overemphasis on profit maximization may discourage
innovation and risk-taking, as firms may prioritize safer, short-term profit-
generating activities over long-term investments in research, development, and
experimentation.
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❑ Economic Inefficiency: Critics argue that profit maximization may not always lead to
economic efficiency or optimal resource allocation. In some cases, firms may prioritize
profit maximization over societal welfare, resulting in market inefficiencies,
monopolistic behavior, and unequal distribution of resources.
❑ Ethical Concerns: Pursuing profit maximization without regard for ethical
considerations can lead to unethical behavior such as fraud, bribery, environmental
degradation, and labor exploitation. Firms may prioritize profit over principles, leading
to reputational damage and loss of trust among stakeholders.
Overall, while profit maximization remains a fundamental objective for many firms, it
is not without its criticisms. Critics argue that a narrow focus on maximizing profits
may overlook the broader societal and environmental impacts of business activities,
leading to negative consequences for stakeholders and society as a whole.
Wealth Maximization Objectives of the Firm

Net Wealth

Shareholder Value

Risk-Return Trade-off

Value-Based Management

Long-Term Perspective
 Wealth Maximization Objectives of the Firm
Wealth maximization, also known as shareholder wealth maximization, is a financial
management principle that aims to increase the net wealth or value of shareholders'
equity in a firm. Unlike profit maximization, which focuses solely on maximizing short-
term profits, wealth maximization considers the long-term value creation for
shareholders.
Here's a more detailed explanation of wealth maximization:
❑ Net Wealth: Wealth maximization focuses on increasing the net wealth of
shareholders, which is the difference between the total market value of a firm's assets
and its liabilities. This approach considers both the quantity and timing of cash flows to
shareholders, taking into account factors such as risk and the time value of money.
❑ Shareholder Value: Wealth maximization prioritizes the interests of shareholders, who
are the owners of the firm. By increasing the value of shareholders' equity, wealth
maximization aims to enhance shareholder wealth and provide a return on their
investment in the form of dividends and capital appreciation.
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❑ Risk-Return Trade-off: Wealth maximization considers the trade-off between risk and return in
investment decisions. While pursuing opportunities to increase shareholder wealth, firms must
assess and manage risks effectively to avoid potential losses that could diminish shareholder
value.
❑ Value-Based Management: Wealth maximization is often associated with value-based
management (VBM) principles, which focus on aligning corporate strategies, operations, and
incentives with the goal of maximizing shareholder value. This includes performance metrics such
as economic value added (EVA), which measures the value created by a firm's operations after
accounting for the cost of capital.
❑ Long-Term Perspective: Wealth maximization emphasizes long-term value creation over short-
term gains. This involves making strategic decisions that maximize the present value of future
cash flows to shareholders, even if it requires sacrificing immediate profits or taking on additional
risk.
In summary, wealth maximization seeks to increase the net wealth or value of shareholders'
equity by making strategic decisions that maximize long-term value creation for shareholders. It
takes into account factors such as risk, the time value of money, and the interests of shareholders,
with the aim of enhancing shareholder wealth over time.
Importance of Wealth Maximization
Shareholder Value Creation

Long-Term Sustainability

Stakeholder Alignment

Competitive Advantage

Value-Based Management
 Importance of Wealth Maximization
Wealth maximization holds significant importance for firms and their stakeholders due to several
reasons:
❑ Shareholder Value Creation: Wealth maximization is directly linked to enhancing shareholder
value. By increasing the net wealth or value of shareholders' equity, firms can provide attractive
returns to investors in the form of dividends and capital appreciation, thereby aligning the
interests of shareholders with the objectives of the firm.
❑ Long-Term Sustainability: Unlike short-term profit maximization, which may prioritize
immediate gains at the expense of long-term viability, wealth maximization focuses on creating
sustainable value over time. This involves making strategic decisions that enhance the financial
health, competitive position, and growth prospects of the firm, contributing to its long-term
success and resilience.
❑ Stakeholder Alignment: Wealth maximization promotes alignment of interests among various
stakeholders, including shareholders, management, employees, customers, suppliers, and the
broader community. When firms focus on creating value for shareholders, they often adopt
practices and strategies that benefit other stakeholders as well, leading to positive outcomes for
the overall business ecosystem.
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❑ Competitive Advantage: Firms that effectively implement wealth maximization strategies
are better positioned to achieve and sustain a competitive advantage in the marketplace.
By making decisions that optimize long-term value creation, firms can differentiate
themselves from competitors, attract investment capital, and capture opportunities for
growth and expansion.

❑ Value-Based Management: Wealth maximization is closely associated with value-based

management (VBM) principles, which provide a framework for aligning corporate
strategies, operations, and incentives with the goal of maximizing shareholder value. By
integrating VBM practices into decision-making processes, firms can improve performance,
enhance efficiency, and drive long-term value creation.

Overall, wealth maximization is important for firms and their stakeholders as it promotes
long-term sustainability, risk management, stakeholder alignment, competitive advantage,
and economic growth. By prioritizing the creation of shareholder value, firms can achieve
enduring success and contribute to broader societal well-being.
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