MANAGERIAL

ECONOMICS

By :
Ratika Srivastava
Dept. of Management studies
1
INTRODUCTION

Emergence of managerial economics as a separate course of

management studies can be attributed to at least three factors
a)Growing complexity of business decision making process due
to changing market conditions and business environment.
b)The increasing use of economic logic, conceptual theories and
tools of economic analysis in the process of business decision
making process.
c)Rapid increase in demand for professionally trained
managerial manpower. 2
Defining Economics
Economics is a social science, which studies human
behavior in relation to optimizing allocation of available
resources to achieve the given goals.

Eg : individual household behaviour, firm, industry and nation

Economics is also a study of choice-making behaviour of the
people.

3
 Managerial Economics

Managerial economics can be broadly defined as the study of

economic theories, logic and tools of economic analysis that
are used in the process of decision making. Economic theories
and techniques of economic analysis are applied to analyze
business problems, evaluate business options and opportunities
with a view to arriving at an appropriate business decision.

4
1. Adam Smith- known as Father of Economics
2. Alfred Marshall of Cambridge School proposed
welfare definition of economics. He stated “economics
is a 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 attainment and
with the use of material requisites of well- being”
3. Douglas : Managerial economics is concerned with the
application of economic principles and methodologies
to the decision making process within the firm or
organization. It seeks to establish rules and principles to
facilitate the attainment of the desired economic goals
of the management.
5
Characteristics
• Micro Economics
• Economics of Firms
• Uses Macro-economics Analysis
• Managerial Economics is Pragmatic
• Managerial Economics is Normative
• Bridge between traditional economics and Business
Management

6
Nature

Arts or science?

7
Scope
• Demand Analysis
• Cost Analysis
• Pricing Practices and Policies
• Profit Management
• Capital Management
• Analysis of Business Environment
• Allied Disciplines

8
Difference b/w Managerial and Traditional Economics

Traditional Managerial
It has Micro & Macro aspects Micro aspect
It is both positive and normative science Normative in nature
It deals with theoretical aspect Practical Aspect
It studies human Behavior on certain No assumptions
assumptions

We study Economic aspects of the Both economic and non-economic aspects

problem

Studies principles underlying rent, wages, Only the principles of profit

interest and profits

Limited scope Wide scope 9

Importance
• Basis of Business Policies
• Predicting economic Quantities
• Estimating economics relationship
• Helpful in Understanding the External forces constituting the
environment.
• Reconciling theoretical concepts of economics in relation to
the actual business behavior and conditions.

10
MICRO ECONOMICS
• The branch of economics that analyzes the market behavior of
individual consumers and firms in an attempt to understand
the decision-making process of firms and households.
• the analysis of the decisions made by individuals and groups,
the factors that affect those decisions, and how those
decisions effect others

11
Micro-economics applied to internal issues :

Operational issues are of internal nature. Internal issues include all those
problems which arise within the business organization and fall within purview
and control of the management .
Some of the basic internal issues are :
What to produce
How much to produce
Choice of technology i.e. choosing of the factor –combination
Choice of price i.e. how to price the commodity
How to promote sales
How to face the price competition
 How to decide on new investments
 How to manage capital and profit
 How to manage inventory i.e. stock of both finished goods and raw material
 Most of the micro economic problems deals with most of these questions.
 The Law Demand
 The Theory of Production 12
 Analysis of Market Structure and Pricing Theory
Profit analysis and management:
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.

Theory of Capital and Investment Decisions:

Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
etc.
13
MACRO ECONOMICS
• Study of the entire economy in terms of the total amount of
goods and services produced, total income earned, level of
employment of productive resources, and general behaviour
of prices.
• Macroeconomics examines economy-wide phenomena such
as changes in unemployment, national income, rate of growth,
gross domestic product, inflation and price levels.

14
Macro-economics
Macro-economics deals with external external issues :

The type of economic
economic system
system in the
the country

General trends in N.I., N.I., employment,
employment, prices,
prices, savings and investments

Structural
Structural change
change inin the
the working
working financial institutions
institutions viz., banks, insurance
companies
companies etc etc

Magnitude of of and trends in foreign
foreign trade

Trends in labour supply and strength of capital market market

Government’s
Government’s economic
economic policies i.e., industrial, monetary, fiscal, price andand
foreign
foreign etc.
etc.

Social factors
factors viz.,
viz., value
value system
system of
of the
the society,
society, property
property rights,
rights, customs
customs and
and
habits
habits etc.,
etc.,

Political
Political environment i.e., democratic, authoritarian, socialist political
political
systems,
systems, oror state
state attitude
attitude towards
towards private
private business
business man
man etc.
etc.
These
These Environmental
Environmental factors
factors have
have aa far-reaching
far-reaching bearing
bearing upon
upon the
the
functioning
functioning and performance
performance of of the firms. Therefore,
Therefore, decision
decision makers
makers have
have to
to
take
take in
in to
to account
account thethe present
present and
and future
future economic,
economic, political
political and
and social
social
15
Responsibilities of Managerial Economist

• To make reasonable profits on capital employed.

• Successful forecasts
• Knowledge of sources of Economic Information
• His status in the firm

16
Fundamental Concepts
• Opportunity cost
• Incremental Principle
• Incremental Cost
• Incremental Revenue
• Business implication of Incremental Concept
• Time Perspective
• Series of order
• Discrimination
• Discounting Principle
• The Equi-marginal Principle

17
The Equi-marginal Principle

• Marginal utility : Change in total utility as a result of

consuming one additional unit of a commodity.
• Marginal cost: Change in total cost as a result of producing
one additional unit of a commodity.
• Marginal product of labour: Change in total product or
output as a result of employing one additional unit of
labour.
• Marginal product of capital: Change in total output or
output as a result of employing one additional unit of
capital.
The optimum level of output should be decided at a point where
marginal revenue is just equal to marginal cost. This is called as 18
equi-marginal principle.
Role of a managerial economist in the firm

Demand estimation and forecasting

Preparation of business /sales forecasts
Analysis of market survey to determine the nature and extent
of competition
Analyzing the issues and problems of concerned industry.
Assisting the business planning process of the firm
Discovering new possible fields of business endeavor and its
cost-benefit analysis
Advising on prices, investment and capital budgeting policies
Evaluation of capital budgeting etc.

19
DECISION MAKING AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.
“Decision making and processing information are two
important tasks of managers”
In order to make good decisions managers must be able
to obtain, process and use information.
20
 Decision
Making
Areas

Demand
forecastin Production Pricing and Investment
Study of decisions
g planning economic related
and cost environmen decisions
revenue t
decision

21
 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.
FURTHER CONT…

23