Introduction to Managerial

Economics
Managerial Economics
Managerial Economics is a science which deals
with the application of economics theory in
managerial practice. It is the study of allocation
of resources available to a firm among its
activities. To be very precise, Managerial
Economics is ‘Economics applied in decision-
making’. It fills the gap between economic
theory and managerial practice.
Managerial Economics - Definition
“Managerial Economics is the integration of
economic theory with business practice for the
purpose of facilitating decision-making and
forward planning by management.”
- Spencer & Siegelman
“The purpose of Managerial Economics is to
show how economic analysis can be used in
formulating business policies.”
-Joel Dean
Managerial Economics
Economic Theories,
Business management
Concepts,
Decision Problems
Methodology and
Tools

Managerial Economics
Application of Economics
in analyzing and solving
Business problems

Optimum solutions to
business problems
MICRO ECONOMICS
Micro-economics is a branch of economics that
studies the behavior of how the individual
modern household and firms make decisions to
allocate limited resources.
Typically, it applies to markets where goods or
services are being bought and sold. Micro-
economics examines how these decisions and
behaviors affect the supply and demand for
goods and services, which determines prices,
and how prices in turn, determine the quantity
supplied and quantity demanded of goods and
services.
MACRO ECONOMICS
Macroeconomics is a branch of economics dealing
with the performance, structure, behavior, and
decision-making of the entire economy. This
includes a national, regional, or global economy.
Macroeconomics study aggregated indicators such
as GDP, unemployment rates, and price indices to
understand how the whole economy functions.
Macroeconomics develop models that explain the
relationship between such factors as national
income, output, consumption, unemployment,
inflation, savings, investment, international trade
and international finance.
Characteristics of Managerial Economics
• It involves an application of Economic theory –
especially, micro economic analysis to practical
problem solving in real business life. It is
essentially applied micro economics.
• It is a science as well as art facilitating better
managerial discipline. It explores and enhances
economic mindfulness and awareness of business
problems and managerial decisions.
• It is 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.
Scope of Managerial Economics
1. Demand Analysis and Forecasting
2. Cost Analysis
3. Production and Supply Analysis
4. Pricing Decisions, Policies and Practices
5. Profit Management, and
6. Capital Management
1. Demand Analysis & 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.
2. 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.
3. 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 influencing supply.
4. 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.
5. Profit Management
Business firms are generally organised 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.
6. 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 labour but
is a matter for top-level decision. Briefly,
capital management implies planning and
control of capital expenditure.
What is Decision-making?
Decision-making is the process of selecting a
particular course of action from among the
various alternatives. Every business manager
has to work on uncertainties and the future
cannot be precisely predicted by anyone. If
everything could be predicted accurately, then
decision-making would become a very simple
process.
What is Decision-making?
Alternative
Selection of a Execution of
course of Result of Action
particular Action Action
Action
available

Full Realisation
of objective

Action A Partial
Decision Chose
Action realisation of
Making n
B objective
Action
Action C

Non-
realisation
of objective
Basic Economic Tools in Managerial Economics

1. Opportunity cost principle

2. Incremental principle
3. Principle of time perspective
4. Discounting principle, and
5. Equi-marginal principle
1. Opportunity Cost Principle
The opportunity cost of the funds employed
in one’s own business is the interest that could
be earned on those funds had they been
employed in other ventures.
The opportunity cost of the time an
entrepreneur devotes to his own business is the
salary he could earn by seeking employment.
The opportunity cost of using a machine to
produce one product is the earnings forgone
which would have been possible from other
products.
2. Incremental Principle
Incremental concept is closely related to the
marginal costs and marginal revenues, for of
economic theory. In actual business situations,
it often becomes difficult to apply the
concept of marginalism which has to be
replaced by incrementalism, for in real world
business, one is concerned with not ‘unit
change’ but ‘chunk change’. For instance, in a
construction project, the labour which a
contractor may change is not by one but by
3. Principle of Time Perspective
The economic concepts of the long run and the
short run have become part of everyday
language. Managerial economists are also
concerned with the short-run and long-run
effects of decisions on revenues as well as costs.
The really important problem decision
in
making is to the -
maintain
right betweenthe long-run and balance
considerations. the short-run
4. Discounting Principle
One of the fundamental ideas in economics is
that a rupee tomorrow is worth less than a
rupee today. This seems similar to saying that a
bird in hand is worth two in the bush. A simple
example would make this point clear.
5. Equi-marginal Principle
This principle deals with the allocation of the
available resources among the alternative
activities. It should be clear that if the value of
the marginal product is higher in one activity
than another, an optimum allocation has not
been attained. It would, therefore, be
profitable to shift labour from low marginal
value activity to high marginal value activity,
thus increasing the total value of all products
taken together.
Scarcity Choice And Production Possibility
Curve
Scarcity
Scarcity Choice And Production Possibility
Curve
Choice
Scarcity gives rise to the economic problem of choice. As there are limited
resources, the choice is given to decide what one wishes to get by sacrificing
one of its demand. When the choice is made there is sacrifice involved in it.

The decision to consume a product also means a decision to not consume

another. One product can only be consumed by giving up something in
exchange. Opportunity Cost refers to the cost of sacrifice that is done to
choose the next best alternative.
Scarcity Choice And Production Possibility
Curve

Production Possibility Curve (PPC) gives a graphical representation of how two

alternatives can be used in combination to achieve maximum satisfaction.
Scarcity Choice And Production Possibility
Curve
PPC curve shows different possible
points of attaining satisfaction. Points
A and B give two different
combinations. At point A, X8 and Y10
goods are produced and at point B X12
and Y7 goods are produced. To
produce more of product X, Product Y
is to be produced less this is seen at
point B, X12 goods are produced only
when good Y is decreased to Y7. This
shows that more and more of good X
is to be produced only when good Y is
sacrificed at its place. A choice needs
to be made as to what amount of a
particular good can be produced to get
the maximum satisfaction from the
available resources.