INTRODUCTION TO

MANAGERIAL
ECONOMICS
WHY MANAGERIAL ECONOMICS?
Managers in their day to day activities, are always
confronted with the several issues such as :
 How much quantity is to be produced
 At what price
 Make or buy decision
 What will be the likely demand…etc

Managerial Economics provides basic insight into

seeking solutions for managerial problems.
Interdisciplinary:

As the name itself implies

Managerial Economics is an offshoot
of two distinct disciplines:

 Economics
 Management
ECONOMICS:

 Economics is the social science that analyzes

the production, distribution

and consumption of goods and services.

 Economics is study of human activity both at

individual and national level.

 Adam Smith, the father of Economics defined
Economics as “The study of the nature & uses
of national wealth”.
BRANCHES OF ECONOMICS:

There are two branches in Economics

 Micro Economics
 Macro Economics
 The study of individual firm is Micro
Economics and is also called theory of firm
 The study of total level of economic activity in
a country is called Macro Economics.
MANAGEMENT:

 Management is the science & art of getting things

done through people.
 Management includes several functions such as:
Planning
Organizing
Staffing
Directing
Coordinating
Regulating
Budgeting & Motivating ….etc
 “The integration of economic theory with the business
practice for the purpose of facilitating decision
making & foreword planning by management”.
Spencer & Siegel
man
 Managerial economics refers to application of
principles of Economics to solve the managerial
problems such as Minimizing the cost or Maximizing
profit.
 Managerial economics directs the utilization of scarce
resources in a goal oriented manner.
 Seeks to understand & analyze the problems of
business decision making.
 Facilitates foreword planning.
 Examines how an organization can achieve its
objectives in most effectively.
 Focuses on Minimizing the cost & Maximizing the profit.
 Micro-economic in character.
 Operates against the backdrop of Macro
Economics.
 Normative Statements.
 It is pragmatic.
 Prescriptive Actions.
 Applied in nature.
 Offers scope to evaluate each alternative.
 Interdisciplinary (Economics, OR, Mathematics,
Statistics, Accountancy, Psychology, OB etc.)
 Assumptions and limitations.
 The scope of managerial economics refers to its
area of study. Subject matter of Managerial
Economics consists of applying economic
principles & concepts towards adjusting various
uncertainties faced by the business firms, such as

 Demand uncertainty
 Cost uncertainty
 Price uncertainty
 profit uncertainty
 Production uncertainty
 Managerial Decision
Areas:
• Production

Concepts • Cost Control

and • Price Determination Optimal
Techniqu • Make or buy decisions
Solutio
es of ME ns
• Inventory Decisions
• Capital Investment
Decisions
• Profit planning and
Management
CONSUMPTION PRODUCTION

SCOP
E

DISTRIBUTION EXCHANGE
Macroeconomics is a branch of economics that
studies how an overall economy—the market or
other systems that operate on a large scale—
behaves.

Macroeconomics studies economy-wide

phenomena such as inflation, price levels, rate
of economic growth, national income, gross
domestic product (GDP), and changes
in unemployment.
Macroeconomics deals with the performance,
structure, and behavior of the entire economy,
in contrast to microeconomics, which is more
focused on the choices made by individual
actors in the economy (like people, households,
industries, etc.).
 Consumer's Equilibrium means a state of
maximum satisfaction.

A situation where a consumer spends his given

income purchasing one or more commodities so
that he gets maximum satisfaction and has no
urge to change this level of consumption, given
the prices of commodities, is known as the
consumer's equilibrium.
 A curve that shows different
combinations of the two goods yielding
the same level of utility to the
consumer is known as an Indifference
Curve.
 Demand for a commodity refers
to the quantity of the commodity
which an individual consumer or a
household is willing to purchase per
unit of time at a particular price.

It implies:
a) Desire to buy
b) Willingness to buy
c) Purchasing power
 ADDITIONAL ADDITIONAL
GENERAL FACTORS FACTORS
FACTORS RELATED TO RELATED TO
LUXURY GOODS MARKET
AND DURABLES DEMAND
Price of the
product Expectation
Income of the Populatio
s of future
consumer n
Tastes and prices
Expectation Social,
Preferences Economic,
Price of related s of future
goods income Demograph
ic
distributio
n of
Advertisemen
consumers
ts
Others
 A mathematical expression of the
relationship between quantity
demanded of the commodity and its
determinants is known as Demand
Function.

Qd = f (P, I, T, PR, EP, EI, P, DC, A, O)

 Law of Demand states that higher the
price, lower the quantity Demanded, and
vice versa, other things remaining
constant.

Q = f(P)

Where, Q is the quantity demanded

f is the function, and
P is the price.
The law of demand may be explained with
the help of the following demand schedule.
 Price of Quantity
 It shows functional Apple (In. Demanded
relationship between Rs.)
the quantity 10 1
demanded of a
product & its price. 8 2

 Demand schedule 6 3
shows different
quantities of a 4 4
commodity demanded
at various prices at a 1 5
given time.
DEMAND CURVE
☺ Veblen goods or luxury goods
☺ Giffen Goods
☺ Commodities which are used as
status symbols
☺ Expectations of change in the price of
the commodity
 ELASTICITY OF DEMAND

Elasticity of Demand helps in providing a

Quantitative value for the responsiveness of
Quantity demanded to change in each of the
determinants in the demand function.

“Marshall” introduced the concept of

Elasticity of demand.
 % change in Quantity Demanded of
Good
Edp =
% change in determinant Z

Δ Q/ Q ΔQ Z
= = *
Δ Z/ Z ΔZ Q
 The larger the value of elasticity, the
more responsive is Quantity Demanded
to changes in the determinant under
consideration.

Types of Elasticity of Demand:

 Price elasticity of demand
 Income elasticity of demand
 Cross elasticity of demand
 Advertising elasticity of demand
 Price elasticity of demand measures changes in
quantity demand to a change in Price. It is the ratio of
percentage change in quantity demanded to a
percentage change in price.

Proportionate change in Quantity demanded of

commodity X
Edp =
Proportionate change in price of commodity X
 Perfectly Elastic
 Perfectly Inelastic
 Unit Elasticity
 Relatively Elastic
 Relatively Inelastic
 No change in price is
required to cause a
change in Quantity
Demanded i.e., When any
Quantity can be sold at a
given price, and when
there is no need to reduce
the price, the demand is
said to be perfectly elastic.

E= ∞
 When a change in
price, however large,
causes no change in
Quantity Demanded
demand is said to be
perfectly inelastic.

E= 0
 When a given
proportionate change
in price causes an
equal proportionate
change in Quantity
Demanded, then the
demand is said to be
Unit Elastic

E=1
 When a change
in price causes a
more proportionate
change in Quantity
Demanded, then the
demand is said to
be relatively elastic.

E >1
When a change in
price causes a less
than proportionate
change in Quantity
Demanded, then the
demand is said to be
relatively inelastic.

E<1
☺ The number and closeness of substitutes
☺ The share of commodity in buyers’ budget
☺ Nature of the commodity
☺ Number of uses a commodity can be put to
☺ Habit forming characteristic
☺ Time period.
NON – STATISTICAL METHODS STATISTICAL METHODS

Complete Enumeration
Survey
Sample Method

Sales force Opinion Method

Expert Opinion Method Delphi Technique /
GD
Test Marketing
Controlled Experiments

Judgemental
Approach
NON – STATISTICAL STATISTICAL METHODS
METHODS
Mechanical Extrapolation / Trend Projection
Methods
Barometric
Techniques
Correlation and Regression
Methods
Simultaneous Equations
Method
Fitting Trend Line by
Observation
Time Series Analysis using Least Squares
Method
Moving Average Method
 Sales = a + b (year number)
i.e., S = a + b . T

Where, a and b are constants determined

using
ΣS = Na + b Σt
Σ St = a Σ t + b Σ t^2

Where, N = No. of years for which data is

available
 This method considers that the
average of past events determine the future
events. The average keeps on moving
depending up on the number of years
selected.
 This method determines values by computing
exponentially weighted system. The weights
assigned to each value reflect the degree of
importance of that value.

Smoothened Value = w (current observed value) +

(1-w) (previous smoothened value)
 It is based on the presumption that
relationship can exist among various
economic time series.

There are three kinds of relationships.

1. Leading series
2. Coincident series
3. Lagging series
 Correlation describes the degree of
association between two variables. When
two variables tend to change together, then
they are said to be correlated.

The extent to which they are

correlated is measured by correlation
coefficient.
 A statistical measure that attempts to
determine the strength of the relationship
between one dependent variable (usually
denoted by Y) and a series of other changing
variables (known as independent variables).

The two basic types of regression are

linear regression and multiple regression.
Linear regression uses one independent
variable to explain and/or predict the outcome
of Y, while multiple regression uses two or more
independent variables to predict the outcome.
 All variables are simultaneously
considered, with the conviction that every
variable influences the other variables in an
economic environment.

It is a system of n equations with n

unknowns.
Supply is the quantity of goods a firm offers
to sell in the market at a given price.

Theory of supply states that with an

increase in price the number of goods a firm
wishes to supply will also increase.
What is the Law of Supply?

The law of supply is the microeconomic law that

states that, all other factors being equal, as the
price of a good or service increases, the quantity
of goods or services that suppliers offer will
increase, and vice versa.

The law of supply says that as the price of an item

goes up, suppliers will attempt to maximize their
profits by increasing the quantity offered for sale.
The chart depicts the law
of supply using a supply
curve, which is upward
sloping.

A, B and C are points on

the supply curve. Each
point on the curve
reflects a direct
correlation between
quantity supplied (Q) and
price (P).
 Production is an
activity that transforms
inputs into output.

It can be defined as
the process of creation of
utility.
 Production Function is purely a
technological relationship which expresses
the relation between output of a good and
the different combinations of inputs used
in its production.

It shows the maximum production

obtained from a given set of inputs with a
given state of technology.
 Production Function can be
expresses mathematically in the form of
an equation.
Q = f (L1, L2, C, O, T)

Where, Q= Quantity of production

f = function C = Capital
L1= Land O=
Organization
L2= Labour T=
Technology
 The advantages of large scale
production are called Economies
of Scale.

 Internal Economies
 External Economies
 Internal Economies are those
economies which are open to an
individual firm when its size
expands.

☺ Technical Economies
☺ Marketing Economies
☺ Managerial Economies
☺ Financial Economies
☺ Risk Bearing Economies
 When the number of firms
producing the same commodity
increase in a particular area, all the
firms enjoy certain advantages
which are called External
Economies.

☺ Economies of Concentration
☺ Economies of Information
☺ Economies of Specialization
☺ Economies of Welfare
 Both internal and external
economies increase the output
and reduce the cost of production.

But, these economies arise

only up to a particular limit
beyond which, diseconomies
emerge.