ECONOMICS- The science of
making decisions in the presence of
scarce resources.
MANAGERIAL ECONOMICS- The
study of how to direct scarce
resources in the way that most
efficiently achieves a managerial
goal.
To quote Mansfield,
“Managerial economics is concerned
with the application of economic
concepts and economic analysis to
the problems of formulating rational
managerial decisions.
Spencer and Siegelman have
defined the subject as “the
integration of economic theory with
business practice for the purpose of
facilitating decision making and
forward planning by management.”
 NATURE OF ECONOMICS
ECONOMICS
SCIENCE ART
POSITIVE NORMATIVE
There are following characteristics of any
science subject, such as;
a) It is based on systematic study of knowledge
or facts;
b) It develops correlation-ship between cause
and effect; (iii) All the laws are universally
accepted
c) All the laws are tested and based on
experiments;
d) It can make future predictions;
e) It has a scale of measurement.
On the basis of all these characteristics, Prof.
Robbins, Prof Jordon, Prof. Robertson etc.
claimed economics as one of the subject of
science like physics, chemistry etc. According
to all these economists, ‘economics’ has also
several characteristics similar to other science
subjects.
 Economics is also a systematic study of
knowledge and facts. All the theories and facts
related with both micro and macro economics
are systematically collected, classified and
analyzed.
 Economics deals with the correlation-ship
between cause and effect. For example,
supply is a positive function of price, i.e.,
change in price is cause but change in supply
is effect.
 All the laws in economics are also universally
accepted, like, law of demand, law of supply,
law of diminishing marginal utility etc.
 Theories and laws of economics are based on
experiments, like, mixed economy to is an
experimental outcome between capitalist and
socialist economies.
 Economics has a scale of measurement.
Economics and Positive Science:
The following statements can ensure
economics as a positive science, such as;
o Logically based: The ideas of economics are
based on absolute logical clarifications and
moreover, it develops relationship between
cause and effect.
o Labour Specialisation: Labour law is an
important topic of economics. It is based on
the law of specialisation of labour Economists
must concern with the causes and effects of
labour-division.
o Not Neutral: Economics is not a neutral
between positive and normative sciences.
According to most economists, economics is
merely positive science rather than normative
science.
Economics and Normative Science:
The following statements can ensure
economics as a normative science, such as,
o Emotional View: A rational human being has
not only logical view but also has sentimental
attachments and emotional views regarding
any activity. These emotional attachments are
all coming under normative statements.
Hence, economics is a normative science.
o Welfare Activity: Economics is a science of
human welfare, All the economic forwarded
their theories for the development of human
standard of living Hence, all the economic
statements have their respective normative
views.
o Economic Planning: Economic planning is
one of the main instruments of economic
development. Several economists have given
their personal views for the successful
implementation of economic plan. Hence,
economics is coming under normative science.
All these lead us to the conclusion that
‘Economics’ is both positive and normative
science. It does not only tell us why certain
things happen however, it
also gives idea whether it is right thing to
happen.
Economics as an Art:
According to Т.К. Mehta, ‘Knowledge is
science, action is art.’ According to Pigou,
Marshall etc., economics is also considered as
an art. In other way, art is the practical
application of knowledge for achieving
particular goals. Science gives us principles of
any discipline however, art turns all these
principles into reality. Therefore, considering
the activities in economics, it can claimed as
an art also, because it gives guidance to the
solutions of all the economic problems.
Therefore, from all the above
discussions we can conclude that
economics is neither a science nor an art
only. However, it is a golden combination of
both. According to Cossa, science and art are
complementary to each other. Hence,
economics is considered as both a science as
well as an art.
 MANGERIAL ECONOMICS IN RELATION TO
MACROECONOMICS, MICROECONOMICS,
AND OPERATION RESEARCH
Microeconomics studies the actions of
individual consumers and firms; managerial
economics is an applied specialty of this
branch. Macroeconomics deals with the
performance, structure, and behavior of an
economy as a whole.
Managerial economics applies microeconomic
theories and techniques to management
decisions. It is more limited in scope as
compared to microeconomics.
Macroeconomists study aggregate indicators
such as GDP, unemployment rates to
understand the functions of the whole
economy.
Microeconomics and managerial economics
both encourage the use of quantitative
methods to analyze economic data.
Businesses have finite human and financial
resources; managerial economic principles can
aid management decisions in allocating these
resources efficiently. Macroeconomics models
and their estimates are used by the
government to assist in the development of
economic policy.
Several problems of managerial economics
are solved by the operation research
techniques. These highlight the significant
relationship between managerial economics
and operations research. The problems solved
by operation research are as follows:
 Allocation problems: An allocation problem
confronts with the issue that men, machines
and other resources are scarce, related to the
number sand size of the jobs that need to be
completed. The examples are production
programming and transportation problems.
 Competitive problems: competitive problems
deal with situations where managerial
decision-making is to be made in the face of
competitive action. That is, one of the factors
to be considered is: “What will competitors do
if certain steps are taken?” Price reduction, for
example, will not lead to increased market
share if rivals follow suit.
 Waiting line problems : Waiting line problems
arise when a firm wants to know how many
machines it should install in order to ensure
that the amount of ‘work-in-progress’ waiting to
be machined is neither too small nor too large.
Such situations arise when for example, a post
office, or a bank wants to know how many
cash desks or counter clerks it should employ
in order to balance the business lost through
long guesses against the cost of installing
more equipment or hiring more labour.
 Inventory problems: Inventory problems deal
with the principal question: “What is the
optimum level of stocks of raw-materials,
components or finished goods for the firm to
hold?”
The above discussion explains that the
managerial economics is closely related to
certain subjects such as economics, statistics,
mathematics and accounting. A trained
managerial economist combines concepts and
methods from all these subjects by bringing
them together to solve business problems. In
particular, operations research and
management accounting are getting very close
to managerial economics.
 Statistics is important to managerial
economics in several ways. Managerial
economics calls for the organising quantitative
data and deriving a useful measure of
appropriate functional relationships involved in
decision-making. For instance, in order to base
its pricing decisions on demand and cost
considerations, a firm should have statistically
derived or calculated demand and cost
functions.
Managerial economics also employs
statistical methods for experimental testing of
economic generalisations. The generalisations
can be accepted in practice only when they are
checked against the data from the world of
reality and are found valid. Managers do not
have exact information about the variables
affecting decisions and have to deal with the
uncertainty of future events. The theory of
probability, upon which statistics is based,
provides logic for dealing with such
uncertainties.
 CIRCULAR FLOW OF MICROECONOMIC
ANALYSIS
Circular flow model is the basic economic
model and it describes the flow of money
and products throughout the economy in a
very simplified manner. This model divides
the market into two categories −
 Market of goods and services
 Market for factor of production
The circular flow diagram displays the
relationship of resources and money
between firms and households. Every adult
individual understands its basic structure
from personal experience. Firms employ
workers, who spend their income on goods
produced by the firms. This money is then
used to compensate the workers and buy
raw materials to make the goods. This is the
basic structure behind the circular flow
diagram. Let’s have a look at the following
diagram −
In the above model, we can see that the
firms and the households interact with each
other in both product market as well as factor
of production market. The product market is
the market where all the products by the
firms are exchanged and factors of
production market is where inputs such as
land, labor, capital and resources are
exchanged. Households sell their resources
to the businesses in the factor market to earn
money. The prices of the resources, the
businesses purchase are “costs”. Business
produces goods utilizing the resources
provided by the households, which are then
sold in the product market. Households use
their incomes to purchase these goods in the
product market. In return for the goods,
businesses bring in revenue.
 ECONOMIC MODELS AND SUB
OPTIMIZATION
 ECONOMIC MODELS
Economic models can be represented using
words or using mathematics. All of the
important concepts in this course can be
explained without math. That said, math is a
tool that can be used to explore economic
concepts in very helpful ways. You know the
saying “A picture is worth a thousand words”? convert these predictions to precise, numerical
The same applies to graphs: they’re a very outcomes.
effective means of conveying information
For example, a theoretical model of an agent’s
visually—without a thousand words. In addition
consumption behavior would generally suggest a positive
to being a “picture,” a graph is also a math-
relationship between expenditure and income. The empirical
based model.
adaptation of the theoretical model would attempt to assign a
The use of algebra is a specific way that numerical value to the average amount expenditure increases
economics express and explore economic when income increases.
models. Where graphs require you to “eyeball”
a model, algebra can give you more precise  SUB OPTIMIZATION
answers to questions. For example, if a
- Situation where a process, procedure, or
business puts their product on sale for 10% off
system yields less than the best possible
the regular price, how much more will
outcome or output, caused by a lack of best
consumers buy? Similarly, using the algebraic
possible coordination between different
formula for a line allows economists to find
components, elements, parts, etc.
precise points on a graphs that help in
interpreting how much of a good should be
sold, or at what price.

An economic model is a simplified

description of reality, designed to yield
hypotheses about economic behavior that can
be tested. An important feature of an economic
model is that it is necessarily subjective in
design because there are no objective
measures of economic outcomes. Different
economists will make different judgments about
what is needed to explain their interpretations of
reality.

There are two broad classes of economic

models—theoretical and empirical. Theoretical
models seek to derive verifiable implications
about economic behavior under the assumption
that agents maximize specific objectives subject
to constraints that are well defined in the model
(for example, an agent’s budget). They provide
qualitative answers to specific questions—such
as the implications of asymmetric information
(when one side to a transaction knows more
than the other) or how best to handle market
failures. Empirical models aim to verify the
qualitative predictions of theoretical models and