Title: Managerial Economics

Objective
The course is designed to enable students to appreciate the contribution of
economics to the business process and to evaluate economics of corporate
objectives, market structure and costs.

Learning Outcomes
The course will develop students' capacity to:
1. Think critically about the contribution of economics in business.
2. Understand the constraints the environment places on the organization's
pursuit of its goals
3. Analyze the economic environment in which an org. operates.

Methodology
The course will commence with making the students understand the basic
economic theories and subsequently learn about practices followed by the
organizations.
Text Book
Managerial Economics, (Fourth edition) H.Craig Petersen, W. Cris Lewis

Reference books
Managerial economics in a global economy, Dominick Salvatore
Managerial economics, Damodaran, Suma
Managerial economics, Dwivedi, D.N.
Managerial economics, H.L.Ahuja
Managerial economics, Truett Lila J.
Managerial economics, Hirschey, Mark
Modern Economic Theory, K.K.Dewitt & Navalkur
S.K. Misra & V. K. Puri, Indian Economy, Himalaya Publishing House, 2011.
Topic

Introduction

Basics of Demand, Supply and Equilibrium

Theory of Consumer Choice

Demand forecasting

Production Theory & Analysis

Cost Theory and Analysis

Market Structure

Macro Economics: Issues

Macro Economics: Concepts
 ECONOMICS

⦿ A social science concerned with those aspects of social behavior

and those institutions which involve the allocation of scarce
resources among unlimited and competing uses, to produce and
distribute goods and services in the satisfaction of human wants,
which are innumerable and insatiable.

Scarce Unlimited Alternative uses of

Resources Wants resources

Produce & distribute goods & services

SCARCITY WEALTH

GROWTH WELFARE
⦿ Wealth Definition by Adam Smith
◼ a science which studies the nature, causes and growth of
the wealth of nations
◼ Adam Smith – Father of economics
⦿ Welfare Definition by Alfred Marshall
◼ study of mankind in the ordinary business of life; it
examines that part of individual and social action which is
most closely connected with the use of the material
requisites of well being. Thus it is, on the one side, a
study of wealth; and on the other, and more important
side the study of man.
⦿ Scarcity Definition by Lionel Robbins
◼ is the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses.

⦿ Four characteristics
◼ Man has unlimited wants or ends.
◼ The means or resources to satisfy them are limited.
◼ These resources are not specific & have alternate uses.
◼ Man has therefore to choose between wants.

⦿ Criticism
◼ Aggregates of the entire economy (national income, total output
etc.) and the problem of unemployment and instability are not
covered
◼ The causes and growth patterns of national income and per
capita income are left untouched.
⦿ Growth Definition by Paul A. Samuelson

◼ is a study of how man and society choose, with or without

the use of money, to employ scarce productive resources
which could have alternate uses, to produce various
commodities over time and distribute them for
consumption now and the future among various people
and groups of society.
 Concerns of Modern Economics

◼ Allocation of society’s resources among alternative uses

◼ Efficiencies and inefficiencies of economic system

◼ Distribution of the society’s output among individuals

and groups

◼ Ways in which production and distribution change over

time
⦿ Consumers

⦿ Producers

⦿ Administrators

⦿ Planners

⦿ Academicians
Studies individual units like individual household,
pricing of a firm, wages of a worker, profits of an
entrepreneur, and so on.

◼ Theory of Demand
◼ Theory of Production
◼ Price determination in Commodity market
◼ Price determination in Factor market
Microeconomic issues
choices: what, how and for whom
the concept of opportunity cost
rational economic decision making: marginal costs
and marginal benefits
microeconomic objectives
✕ efficiency
✕ equity
Deals with the average and aggregates of the system rather
than the particular items in it, and attempts to define these
aggregates in a useful manner and examines their
relationship.
◼ Theory of National Income
○ GDP/GNP/NDP
◼ Theory of Employment
○ Unemployment, its types and rate

◼ Theory of Money
○ Commodity money (barter), modern money (paper), banking
and insurance, interest rates.
○ Three purpose – transaction, saving and speculative
◼ Theory of General Price Level
○ Wholesale Price index, consumer price index
◼ Theory of International Trade
○ Balance of payment, foreign exchange rate and
purchasing power parity theory
◼ Economics of Growth
○ Four factors – human resource, natural resource,
capital formation and technological changes and
innovation
○ Business cycles, investment and savings
⦿ Macroeconomic issues
◼ growth
◼ unemployment
◼ inflation
◼ balance of payments problems
◼ cyclical fluctuations
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Microecon Production/Outpu Price of Distribution of Employment by
omics t in Individual Individual Goods Income and Individual
Industries and and Services Wealth Businesses &
Businesses Industries
Price of medical Wages in the Jobs in the steel
How much steel care auto industry
How many offices Price of gasoline industry Number of
How many cars Food prices Minimum wages employees in a
Apartment rents Executive firm
salaries
Poverty
Macroeco National Aggregate Price National Income Employment and
nomics Production/Outpu Level Total wages and Unemployment in
t salaries the Economy
Consumer price
Total Industrial index Total corporate Total number of
Output Producer Price profits jobs
Gross Domestic index Unemployment
Product Rate of Inflation rate
Growth of Output
• Production The process by which resources are
transformed into useful forms
• Resources/ Inputs Anything provided by nature or
previous generations that can be used directly or
indirectly to satisfy human wants.
• Capital Things that have been already been
produced that are in turn used to produce other
goods and services
• Producers Those people or groups of people,
whether private or public, who transform resources
into usable products.
• Outputs Usable products
Illustrates the principles of constrained choice,
opportunity cost and scarcity.

A graph that shows all the combinations of goods and

services that can be produced if all of society’s
resources are used efficiently
 A production possibility curve
8
a

6
Units of food (millions)

Units of food Units of clothing

4
a 8m 0.0
7m 2.2m
6m 4.0m
5m 5.0m
2 4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m
0
0 1 2 3 4 5 6 7

Units of clothing (millions)

 A production possibility curve
8

6
Units of food (millions)

Units of food Units of clothing

4
8m 0.0
b 7m 2.2m
6m 4.0m
5m 5.0m
2 4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m
0
0 1 2 3 4 5 6 7

Units of clothing (millions)

 A production possibility curve
8

6
x
Units of food (millions)

0
0 1 2 3 4 5 6 7

Units of clothing (millions)

 A production possibility curve
8

w
6
x
Units of food (millions)

0
0 1 2 3 4 5 6 7

Units of clothing (millions)

What the curve shows?

The production possibility curve

microeconomics and the production possibility
curve:
✕ choices and opportunity cost
 Increasing opportunity costs
8

6
x
Units of food (millions)

1 y
1
4

0
0 1 2 3 4 5 6 7

Units of clothing (millions)

The production possibility curve
microeconomics and the production possibility
curve:
✕ choices and opportunity cost
✕ increasing opportunity cost
 Increasing opportunity costs
8

6
x
1
Units of rice (millions)

y
1
4
2
z
1
2

0
0 1 2 3 4 5 6 7

Units of wheat (millions)

The production possibility curve
microeconomics and the production possibility
curve:
✕ choices and opportunity cost
✕ increasing opportunity cost
macroeconomics and the production possibility
curve:
✕ production within the curve
 Making a fuller use of resources

Production inside
Food

the production
possibility curve

O
Clothing
 Making a fuller use of resources

x
Food

O
Clothing
 Making a fuller use of resources

x
Food

O
Clothing
The production possibility curve
microeconomics and the production possibility
curve:
✕ choices and opportunity cost
✕ increasing opportunity cost
macroeconomics and the production possibility
curve:
✕ production within the curve
✕ shifts in the curve
 Growth in potential output
Food

Now

O
Clothing
 Growth in potential output

5 years’ time
Food

Now

O
Clothing
⦿ Managerial economics consists of the use of
economic modes of thought to analyze business
situations.
McNair and Meriam
⦿ Thepurpose of Managerial Economics is to show
how economic analysis can be used in
formulating business policies by
◼ Identifying possible courses of action
◼ Evaluating the revenues and costs associated with each
course of action
◼ Choosing the one course that best meets the goal or
objective of a firm
⦿ The application of economic theory and the
tools of decision science to examine how an
organization can achieve its aims or
objectives most efficiently.
⦿ Households
◼ The consuming units in an economy
⦿ Firms
◼ The producing units in an economy
⦿ Product or Output markets
◼ The market in which goods and services are
exchanged
⦿ Input or Factor markets
◼ The markets in which the resources used to
produce products are exchanged
◼ Labor market
◼ Capital market
◼ Land market
Goods and services
Goods and services

Consumer
expenditure
 Goods and services

Consumer
expenditure

Services of factors of production (labour, etc)

 Goods and services

Consumer
expenditure

Wages, rent
dividends, etc.

Services of factors of production (labour, etc)

 Goods and services

Consumer
expenditure

GOODS MARKETS

FACTOR MARKETS

Wages, rent
dividends, etc.

Services of factors of production (labour, etc)