UNIT 1 INTRODUCTION TO MANAGERIAL ECONOMICS

Objectives
After studying this unit, you would be able to:
 Describe the meaning of Economics.
 Distinguish various economics technological term.
 Apply economic principles which help in making business decisions.
 Compare the relationships of Managerial Economics with other subjects.
Structure
1.1 Introduction
1.2 Definition of economics & Managerial Economics
1.3 Managerial economics, its nature & scope
1.4 Application of managerial economics in business decision making
1.5 Application of managerial Economics in business
1.6 Summary
1.7 Keywords
1.8 Self assessment questions
1.9 Further readings
1.10 Model Answer

1.1 INTRODUCTION

The business managers have to take appropriate decisions to reach their goals and attain their
objectives. The managers have to optimize the output at the lowest cost and to earn more profit. The
study of economics helps them in applying economics logic, tools, methodology, concepts, and theories
of economic analysis, to achieve the objectives of the firm.
The world is dynamics and changing, hence the managers have to keep abreast with the modern and
latest knowledge.
The managers have to use the modern tools to get the desired results.
Now business has become very complex and many factors affect the business.
The main features of modern business environments are, ever increasing inter-firm and inter-industry
competition with domestics as well as international competition. Here China is the main example how
China is selling mass produced goods cheaply and trying to put the Indian market in a bad shape and
affecting the Indian economy.
Hence the study of Managerial economics and economics helps the managers to take proper decision to
achieve their goals.
1.2 DEFINITIONS
Managerial economics refers to the integration of Economic principles and methodologies practices for
the purpose of facilitating decision making and forward planning by the management within the given
situation. It focuses in identifying the problems and solving the problems by taking proper decision. For
example a manager has to decide whether he should get the work done by hiring labor or give it to an
outside contractor.

Different economist have defined economics differently

Dr. Alfred Marshall: “Economics is the study of mankind in the ordinary business of life; it examines
the part of individual and social action which is most closely connected with the attainment and
with the use of material requirements of well being”.
This definition gives more importance on the welfare of human being. In the modern world
there is need of human welfare and it has become the policies of all the governments in the
world.
Prof. Lionel Robins: “Economics is the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses.
This definition shows that wants are unlimited and means are limited and scarce and the means
can be put to other alternate uses.

Unlimited wants are natural for human beings and all wants cannot be satisfied at a time, hence he has
to adopt the method of choice. He tries to select that choice, which gives him maximum satisfaction. .

Available means can be used in various ways. All the economic problems arise due to scarce means and
unlimited ways to use those means. This leads to choice among most competing ends. This is the main
cause of basic problems for the study of economics

Economics deals with optimum utilization of scarce resources to achieve the objectives and to maximize
profit of the firm.

In nutshell economics is “the study of how people and society choose to employ scarce resources that
could have alternative uses in order to produce various commodities and to distribute them for
consumption, now or in future, among various persons and groups. In nutshell economics is “the study
of how people and society choose to employ scarce resources that have alternative uses in order to
produce various commodities and to distribute them for consumption, now or in future, among society.”
Economics is applied in decision making. It is that branch of economics which operates as a link between
abstract theory and managerial practices.. It is based on economic analysis for identifying, problems,
organizing, information and evaluating alternatives.

Suppose your have Rs.100/- to spend. You have many choices, such as buy a book; or go to a picture or
entertain friends. If you make one of the choices, you cannot think of other choices at all. But you will
make a choice which will give you maximum satisfaction.

Study of economics mainly divided into 2 broad sections:

MICRO-ECONOMICS & MACRO-ECONOMICS

MICRO-ECONOMICS: Micro Economics deals with the study of Micro organs of the economy
and their related matter. Following flow-chart explain the elements covered under the study
of micro-economics.
 C
MICRO ECONOMICS

Theory of Commodity Theory of factor Economics of Welfare

Pricing Pricing

Theory of Theory of Rent Wages Interest Profits

Demand Supply

hart 1.1 Importance of Micro economics in the Managerial Economics

 Micro economics has to study the performance of Individual units in the economy at
present and in future. If the share of factors of production increases, it means an
increase in income of an individual. This will lead to an increase in the demand of all the
products and it will increase the economic activities. In other words we can say that if
the purchasing power of an individual increases his demand of various goods and
services will also increase. Another example can further give the picture of the
consumer. With a fall in price of a product the demand for that product increases and if
the price rises the demand decreases.
 It also reveals the cost of production of a product and how is it priced. Here we also
study the concept of elasticity of demand.
 How different factors of production get their share in the nation income
 It also gives the idea of welfare economics

MACROECONOMICS
Other part of economics is Macro Economics. The subject matter of Macro Economics
includes the total economic units of an economy. It is the study of aggregates, i.e. aggregate
employment, aggregate income, aggregate saving and investment, trade cycles, government
policies, imports and exports and global effects on the economy of the country. Role of
banking policies also plays an important role in the economy. Savings and investments are
controlled by the monetary policy of the government through its central bank.
 Recently the prices of petroleum products were increased by the govt. You can study the
effects of this increase on the economy and on the individual. Similarly when prices are
rising, causing inflation you can study the effects of it on the poor who have to spend all the
income on the demand of essential goods and services. This reduces the total demand and
affects the economy.

MACRO ECONOMICS

Theory of Income Theory of General Theory of Macro

& Employment Price Level and Economic Economic
Inflation Growth Theory of
Distribution

Theory of Theory of
Consumption Investment

Theory of
Business
Cycles

Chart 1.2 Importance of Macro economics in the Managerial Economics

Meaning
 To use the scarce resources to obtain optimum output and profit.
 To use the tools to select the best alternatives to achieve the objectives.
  To study the market regarding demand, supply availability of factors of productions and risk
management.
 To decide the pricing of the product after studying the market conditions, income of the people
and their taste, religion, and culture.
 To study the implication and effects of fiscal and monetary policies i.e. Policy of taxation and
subsidy and its effect on the price of the final product. Recently the govt. increased the tax on
petrol and the price of petrol went up. Similarly cooking gas is subsidized by Rs.400/- and the
people are paying less price for the cooking gas. Monetary policy affects the cost of borrowing
for investment
 To study the external forces such as business cycle, political situation, social structure, these
affect the business.
 To study labour relations in order to maintain productivity and efficiency of labour by giving
incentives and motivate them.
 Government intervention through different laws in the country which regulate, control the
business activities. It has become necessary to control the adverse effects of capitalism on the
economy.
Activity 1
Differentiate - wants and means
a) Purchase LCD TV - ________________________
b) Import of crude oil - ________________________
c) Promotion in the organization with salary hike- ________________________
d) Got a bonus payment - ________________________
e) Foreign exchange reserve - ________________________
f) Going for world tour - ________________________
Name any current 4 Economics problems of world
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Differentiate between Micro economic and Macro economics for following
1. Unemployment - ________________________
2. Inflation - ________________________
3. Price revision of LG Refrigerator - ________________________
4. RBI decision to increase interest rate - ________________________
5. The demand for Bajaj DTSI bike will grow by 5% in year 2012-13 -
________________________
1.3 MANAGERIAL ECONOMICS - NATURE AND SCOPE

1.3.1 Nature of Managerial Economics

 It is essentially MICRO economics in nature.
 It is pragmatic.
 It is normative.
 It uses some of the theories of macro economics
 It is problems solving of business in nature.
 Economics has limited application and has to studymultidimensional areas which include social,
cultural, religious, political and international environment.
 Every happening in the world affect the economy of the country for example recession in US has
affected the economies of Europe, china, Japan and still its effect is felt in the world.
 Microeconomic deals with individual units of an economy such as an individual, or a firm and
their related matter. It is a practical subject and goes beyond providing abstract theoretical
framework for managers.

This main source of concepts and analytical tools for management is found in the study of
economics. It studies essentials of demand, and supply, marginal cost, short run and long run cost,
different forms of markets such as perfect competitive, monopoly, monopolistic competition, and
oligopoly and how these markets operate regarding pricing of the product and output.
Macro economics deals in forecasting of demand in order to plan for future needs of capital and
investment. This is based on market demand at macro level and individual, organization demand at
micro level.
At Macro level we study the theory of income and employment, Trade cycle and its effects of the
economy. Different causes of inflation, recession and depression. Further we have to study the role
of the government and its policies to meet these challenges in the economy.

1.3.2 Scope of Managerial Economics

Managerial Economics is a very useful subject. It explains and clarifies most of the major business
problems such as;
 Estimation of product demand and source of supply of various factors.
 Analysis of product demand and plan the production schedule.
 Decide the input combination to obtain maximum output at minimum cost.
 Estimation and analysis cost of the product. And how the cost of the product can be
reduced
  Analysis of price of the product and try to push the product in the market as per the market
conditions
 Study of the market structure.
 Profit maximization and planning.
 To Plan and control capital expenditure
 To evaluate the various policies adopted by the government and judge the effects of it on
the business.

1.4 APPLICATION OF MANAGERIAL ECONOMICS IN DECISION MAKING.

 Demand is the origin of all economic activities hence it needs a special attention. Here estimation of
demand is very important. Estimation of demand depends on various factors such as income,
distribution of income, likes and dislikes of the people, their culture and the way of life.
 When we are using inputs we have to use various scarce resources and their combination to get
maximum output at a minimum costs by avoiding any wastage.
 Pricing of the product is another important issue which has to be decided after studying various
factors such as elasticity of the demand and the market structure i.e. completive market, monopoly,
monopolistic competition, and oligopoly.
There is also a need to estimate the demand and how long the demand will last.
 It studies the concept of production function, optimum utilization of resources, inventory
management, and maximization of sale.
 Market structure also decides pricing system based on elasticity of demand of the product
 To maximize profit and plan to maximize it depend on the decision of the managers who base their
decision after study of the market
 How to utilize the capital so that it can bring maximum returns .This is a very important.
 Capital budgeting and study of relationship between inputs and outputs.
 Planning for future by using multi disciplinary approach by using tools provided by accounting,
finance, marketing, and quantitative analysis by using scientific methods.

ACTIVITY- 2
Identify the type of market:
1 FMCG - ________________________
2 Mobile service providers - ________________________
3 Cement manufacturer and recent CCI decision to penalize 11 cement companies-
________________________

1.5 APPLICATION OF MANAGERIAL ECONOMICS IN A BUSINESS

 Chart 1.3 Applications of Managerial Economics
 Managerial Economics and Marketing.
 Planning for product demand in coming year.
 Forecast demand for different product and draft strategies and tap new market.
 Managerial Economics and Finance.
 Forecast the cash flow of the organization on the basis of demand and supply
 Pricing strategy and earning and profit.
 Managerial Economics and HR
 How much manpower required in coming days.
 Required skill availability
 Managerial Economics is used all the streams directly or indirectly.
(No description)
 Managerial economics and other social sciences

The part of Sociology, Psychology and other social sciences is equally helpful in Managerial
economics and are used for market research and behavior of the society. Sociology shows the
social effect of social life. We have to use many conventional concepts have to be used as society
and social life needs them. E.g. Gifts at the time marriage is a social custom. Lot of expenditure is
done in marriage

Chart 1-4

1.6 SUMMARY
Managerial Economics refers to the application of principles of economics in decision making in the
business. It uses the help from accounting and other subjects like mathematics, statistics, .operational
research, sociology psychology etc.
It uses the help of account, production, marketing techniques and finance to take decision.
Managerial economics is applied economics and based on normative economics
Managerial economics has to decide:
 What to produce?
 How to produce?
 How much to produce?
 For whom to produce?
 At what cost it is to be produced?
 How to decide price?
Managerial economics has to study the market, determine the demand based on forecasting and other
circumstances. While pricing the product it has to study elasticity of demand, income of the people and
has to prepare strategy for increasing its profit and its share in the market.
It has many tools given by other social and natural sciences such as social set up, religion, mathematics,
statistics, operational research, capital management and pricing.
Finance has greater role to play in the study of managerial economics.
But the scope of Economics is wider than the scope of managerial economics.

1.7 KEYWORDS
 Aggregate demand: The expenditure that the households and firms are undertaking on
consumption and investment.
 Consumption: act of satisfying one’s wants.
 Demand: The quantity of goods and services desired by a customer duly supported by the ability
and willingness to purchase by parting with money.
 Economics: The science of choice when faced with unlimited ends and scarce resources having
alternative uses.
 Fiscal Policy: A set of guidelines for the government’s earning and spending.
 Macro Economics: The branch of economics which studies the aggregate behavior of the
economic system.
 Micro Economics: The branch of economics that deals with small individual units of an economy.
 Monetary Policy: A mechanism to regulate the money supply in an economy. It is concerned
with the cost and availability of credit.
 Price: Value when expressed in terms of money.
 Utility: The want satisfying quality of goods.

1.8 SELF ASSESSMENT QUESTIONS

  Explain various types of business decisions that a manager has to make?
 How Managerial Economics is influenced by Economics?
 Discuss the nature and scope of managerial economics.
 How Managerial Economics is related to other subjects.
 Managerial Economics uses the theories of economics and the methodologies of decision
science for managerial decisions. Discuss
 Discuss nature and scope of managerial economics.

QUIZ:

Q1) Which of the following is true with reference to opportunity cost?

o It is the value of the next best use for an economic good.
o It is the value of a sacrificed alternative.
o It is useful in decision making.
o It is useful for valuing non marketed goods

Q2)Economic problem arise because of

o Abundant resources
o Resources are scarce
o Inefficiency of authority
o Inefficient use of Resources
Q3Which of the following is not a factor of production?
o labour
o land
o Profit
o Capital
Q4)You have two things you can do tonight. You can go to the movies with friends or you can
study for your economics quiz.
What is the opportunity cost of going to the movies with your friends?
Having fun with your friends.
o Getting a good grade on your economics quiz.
o Both a and b.
o Neither a nor b.

Q5) Which one is a quadratic equation?

o Q = a +bL- cL2
o Q = a +bL + cL2-dL3
o Q = aLb
o None of the above
o Show Score
1.9 FURTHER READINGS
 Dr. D.M.Mithani Managerial Economics
Dr. H.L.Ahuja Managerial Economics
Prof. Joel Dean Managerial Economics
Dr. MukundMahajan Managerial Economics

1.10 MODEL ANSWERS

Activity no 1
 Differentiate wants and means
Answer
a) Want
b) Means
c) Means
d) Means
e) Means
f) Wants
 Name any current 4 economic problems of world
Main four economics problems of the world
1. Population explosion.
2. Recession
3. Least developed countries
4. Food
 Differentiate between Micro economic and Macro for the following.
1. Unemployment Macro.
2. Inflation. Macro
3. Price revision of LG Refrigerator Micro.
4. RBI decision to increase interest rate. Macro
5. The demand for Bajaj DTSI bike will grow by 5% in year 2012-13 Micro
Activity No.2
1. F.M.C.G. Market is competitive.
2. Mobile service provider Monopolistic competition.
3. Cement ICC decision Oligopoly