ECONOMICS

for
MANAGERS

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 What is Managerial Economics?

Economics is termed as QUEEN of social science,

which studies human behavior in relation to
optimizing allocation of available resources to achieve
the given ends.

Spencer and Siegelman define Managerial Economics

as:
“Managerial economics is the integration of economic
theory with business practice for the purpose of
facilitating decision –making and forward planning.”
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 Decision Making &Forward Planning

Business involves Decision Making & Forward

Planning.

Decisions can be classified as:

•Financial Decision
Production Decisions
•Personal Decisions
•Marketing Decisions
•Miscellaneous Decision

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 Nature of Managerial Economics?

• APPLICATION OF ECONOMIC THEORY – especially, micro economic analysis to

practical problem solving in real business life. It is essentially applied micro
economics.

• SCIENCE AS WELL AS ART facilitating better managerial discipline. It explores and

enhances economic mindfulness and awareness of business problems and
managerial decisions.

• CONCERNED WITH FIRM’S BEHAVIOUR in optimum allocation of resources. It

provides tools to help in identifying the best course among the alternatives and
competing activities in any productive sector whether private or public.

• TOOLS TO HELP IN IDENTIFYING THE BEST COURSE among the alternatives and
competing activities in any productive sector whether private or public.

• INTEGRATION OF DIFFERENT SUBJECTS it involves use of Mathematics, Statistics,

Accounting, Management, Operation Research, Information Technology etc. 6
Branches of Economics

•Micro Economics
•Macro Economics

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 •Micro Economics
is the study of decisions made by individuals and
businesses regarding the allocation of resources and prices
of goods and services.

Microeconomics focuses on supply and demand and other

forces that determine the price levels in the economy. It
takes what is referred to as a bottom up approach to
analyzing the economy.

In other words, microeconomics tries to understand

human choices and resource allocation.

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 • Macro Economics

studies the behavior of a country and how its

policies affect the economy as a whole.

It analyzes entire industries and economies, rather than

individuals or specific companies, which is why it's a top-
down approach. It tries to answer questions like "What
should the rate of inflation be?" or "What stimulates
economic growth?“

It examines 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. 9
 Scope of Managerial
Economics
Demand Production
Analysis and and Supply Cost
Forecasting Analysis Analysis

Pricing
Decisions, Capital Profit
Policies and Management Management
Practices 10
 Demand Analysis and Forecasting

• A business firm is an economic organism which

transforms productive resources into goods that are
to be sold in a market. A major part of managerial
decision-making depends on accurate estimates of
demand. Before production schedules can be
prepared and resources employed, a forecast of
future sales is essential. This forecast can also serve
as a guide to management for maintaining or
strengthening market position and enlarging profits.
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 Cost Analysis

• A study of economic costs, combined with the data

drawn from the firm’s accounting records, can yield
significant cost estimates that are useful for
management decisions. The factors causing
variations in costs must be recognized and allowed
for if management is to arrive at cost estimates
which are significant for planning purposes. An
element of cost uncertainty exists because all the
factors determining costs are not always known or
controllable.
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 Production & Supply Analysis

• Production analysis is narrower in scope than cost

analysis. Production analysis frequently proceeds in
physical terms while cost analysis proceeds in
monetary terms. Production analysis mainly deals
which different production functions and their
managerial uses. Supply analysis deals with various
aspects of supply of a commodity. Certain
important aspects of supply analysis are: Supply
schedule, curves and function, Law of supply and its
limitations, Elasticity of supply and Factors
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 Pricing Decisions, Policies and
Practices

• Pricing is a very important area of Managerial

Economics. In fact, price is the genesis of the
revenue of a firm and as such the success of a
business firm largely depends on the correctness of
the price decisions taken by it. The important
aspects dealt with under this area are: Price
Determination in various Market Forms, Pricing
Methods, Differential Pricing, Product-line Pricing
and Price Forecasting.
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 Profit Management

• Business firms are generally organized for the

purpose of making profits and, in the long run,
profits provide the chief measure of success. In this
connection, an important point worth considering is
the element of uncertainty existing about profits
because of variations in costs and revenues which,
in turn, are caused by factors both internal and
external to the firm. If knowledge about the future
were perfect, profit analysis would have been a very
easy task.
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 Capital Management

• Of the various types and classes of business

problems, the most complex and troublesome for
the business manager are likely to be those relating
to the firm’s capital investments. Relatively large
sums are involved, and the problems are so
complex that their disposal not only requires
considerable time and labor but is a matter for top-
level decision. Briefly, capital management implies
planning and control of capital expenditure.
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 6 Principles/Concepts of
ME
Equi-
Incremental marginal Opportunity
Principle Principle Cost Principle

Time
Perspective Discounting Risk &
Principle Principle Uncertainty
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 Incremental Principle
This principle states that a decision is said to be
rational and sound if given the firm’s objective of
profit maximization, it leads to increase in profit,
which is in either of two scenarios-

• If total revenue increases more than total cost

• If total revenue declines less than total cost

• A course of action should be pursued up

to the point where its incremental
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Illustration:
The firm gets an order The addition to cost due
which can get it an to new order is the
additional revenue of Rs.
2000. The normal cost following:
of production of this
order is:

• Firm would earn a net

profit of Rs 2,000 – Rs.
1400 = Rs. 600 while at
first it appeared that the
firm would make a loss
of Rs.400 by accepting
the order.

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 Equi-marginal Principle
• The laws of equi-marginal utility states that a
consumer will reach the stage of equilibrium when
the marginal utilities of various commodities he
consumes are equal. The law of Equi-marginal
utility. According to the modern economists, this
law has been formulated in form of law of
proportional marginal utility. It states that the
consumer will spend his money-income on different
goods in such a way that the marginal utility of each
good is proportional to its price
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 Opportunity Cost Principle
• Opportunity cost is one of the most important and
fundamental concepts in the whole of economics. Given
that we have said that economics could be described as a
science of choice, we have to look at what sacrifices we
make when we have to make a choice. That is what
opportunity cost is all about.  Sacrifice of Alternatives 
Opportunity cost is the minimum price that would be
necessary to retain a factor-service in it’s given use. It is
also defined as the cost of sacrificed alternatives  By
opportunity cost of a decision is meant the sacrifice of
alternatives required by that decision.
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 Time Perspective Principle
According to this principle, a manger should give due
emphasis, both to short-term and long-term impact of his
decisions, giving apt significance to the different time
periods before reaching any decision.
Time Period:
Short-run refers to a time period in which some factors are
fixed while others are variable. The production can be
increased by increasing the quantity of variable factors.
long-run is a time period in which all factors of production
can become variable. Entry and exit of seller firms can take
place easily.
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 Discounting Principle
According to this principle, if a decision affects costs
and revenues in long-run, all those costs and revenues
must be discounted to present values before valid
comparison of alternatives is possible. Discounting
can be defined as a process used to transform future
rupees into an equivalent number of present rupees.
This is essential because a rupee worth of money at a
future date is not worth a rupee today. Money
actually has time value. For instance, Rs.100 invested
today at 10% interest is equivalent to Rs.110 next
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 Risk &Uncertainty Principle
Management must assume the risk of making decisions for their
institution in uncertain and unknown economic conditions in the future.
Firms may be uncertain about production, market prices, strategies of
rivals, etc. Under uncer­tainty, the consequences of an action are not
known immediately for certain.

Economic theory generally assumes that the firm has perfect knowledge
of its costs and demand relationships and of its environment.
Uncertainty is not allowed to affect the decisions. Uncertainty arises
because producers simply cannot foresee the dynamic changes in the
economy and hence, cost and revenue data of their firms with
reasonable accuracy.

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 Significance of Managerial
Economics

• In order to enable the manager to

become a more competent model
builder, managerial economics provides
a number of tools and techniques.
• Managerial economics provides most of
the concepts that are needed for the
analysis of business problems.
• Managerial economics is helpful in
making decision.
• Evaluating choice of alternatives. 25