Handout in Managerial Economics
Liquigan, LPT
Managerial Economics
According to Spencer: “Managerial economics is the
integration of economic theory with business practice for
purpose of facilitating decision making and forward
planning by management”.
Scope of Managerial Economics
1. Demand Analysis & Forecasting: A major part of
managerial decision making depends on accurate
estimates of demand. By forecasting future sales manager
prepares production schedules and employ resources
which helps mgt. to strengthen its market position &
profit.
2. Cost & production Analysis: A manager prepare cost
estimates of a range of output, and choose the optimum
level of output at which cost is minimized. Manager is
supposed to carry out the production function analysis to
avoid wastage of materials & time.
3. Pricing Decisions: Success of a business firm depends
upon correct pricing policy decisions taken by it. Different
pricing method is used for various market structure,
Because price to a great extent determines the revenue of
the firm.
4. Profit Management: Aim of business firms is to earn
profits in long run. Profits are reward for uncertainty &
risk bearing. A manager should be able to take calculated
risk & try to avoid uncertainty for higher profits
5. Capital Management: Managerial Economics helps in
planning & controlling of capital expenditure since it
involves huge amount of money & time.
Nature of Managerial Economics
1. Allocation of resources: since resources are scarce and
they have multiple uses, managerial economics focuses on
optimum allocation of funds available, which also reduces
the wastage level.
2. Micro economic nature: Managerial Economics is micro
economic in character. It deals with business firms. a firm
is the smallest decision making unit of production. since
the study is about firm,the problems faced by the firms
also falls under the purview of micro economics.
3. Market knowledge: a firm is open to threats as well as
opportunities in market place. So knowledge of market
must be perfect.
Ms. Ruby T.
4. Macro-setting: a firm has to operate within a given
economy. So it is also governed & affected by the trends in
income, consumption, investment, savings levels in an
economy.
5. Positive & Normative Approach: Positive approach
concerns with what is, was or will be, while normative
approach concerns with what ought to be. Positive
economics is of 2 types: Economics description shows
state of operation of the firm at a point of time whereas
economic theory explains why it happened.
Relationship with other Disciplines.
1. Statistics & Economics: Statistical techniques are very
useful for collecting, processing & analyzing business data,
testing & validity of economic laws before they can be
applied to business.
2. Operation Research & Economics: Operation Research is
an activity carried out by specialist within the firm to help
the manager to do his job of solving decision problems.
Operation Research is also concerned with model building
but economic models are more general & confined to
broad decision making. OR models like linear
programming, queuing are widely used in managerial
economics.
3. Accounting & Economics: Accounting data & statements
reflect financial position, net loss or net profit earned by a
company. For decision-making a manager should be
familiar with generation, interpretation & use of
Accounting data.
4. Mathematics & Economics: Managers have to deal with
quantitative concepts like demand, cost, prices & wages. So
knowledge of mathematical concepts is imp to take
decisions.
5. Computers & Economics: Today each person is
dependent on computers. Managers depends on computer
for decision making. Through computer data is presented
in organized manner which facilitates decision making.
Role of Managerial Economist in Business
1. Specific Decisions: There are several specific decisions
that managers might have to take like: Production
scheduling, demand forecasting, market research, security
management analysis, economic analysis of the industry,
advice on trade, Pricing decisions.
2. General Tasks: It includes understanding external
factors & suggesting the firm which policy is to be used.
External factors include- economic condition of the
economy, demand for the product, market conditions of
Handout in Managerial Economics Ms. Ruby T. Liquigan, LPT
raw materials, input cost of the firm affected by outside
forces.

Role of Business in Society

Why Firms Exist?

 Business is useful in satisfying consumer wants.

 Business contributes to social welfare

Social Responsibility of Business

 Serve customers.
 Provide employment opportunities.
 Obey laws and regulations.

Theory of the Firm

 Expected Value Maximization

 Owner-managers maximize short-run profits.
 Primary goal is long-term expected value
maximization.
 Constraints and the Theory of the Firm
 Resource constraints.
 Social constraints
 Limitations of the Theory of the Firm
 Alternative theory adds perspective.
 Competition forces efficiency.
 Hostile takeovers threaten inefficient managers.