MANAGERIAL ECONOMICS

Managerial Economics is Economics applied in

decision making in a unit or a firm.
A link between abstract theory and material
practices.
Economics is concerned with the problem of
allocation of scarce resources.
Provides a number of concept & analytical
tools to understand & analysis a problem.
DIFFERENT SCHOLAR VIEWS
According to Mc nadir &Medium- Managerial
Economics is the use of economic models of
thought to analyze business situation.
Spencer & Siegal man-Managerial Economics is
integration of economic theory & business practices
for facilitating decision-making &forward planning
by management.
Brigham & Pappas- Managerial Economics is the
application of economic theory & methodology to
business administration practices.
 COMMON FEATURES IN
DIFFERENT VIEWS
Concerned with decision making of economic
nature.
Deals with how decision should be made by the
managers to achieve the organization goals.
Managerial Economics is pragmatic. It is concerned
with those analytical tools, which are useful in
improving decision-making.
Managerial Economics is both conceptual &
metrical (Quantitative Technique)
Provides a link between traditional economic &
decision-making Sciences.
 NATURE
Managerial Economics is concerned with the business firm
and the economic problems that every business management
need to solve.
1 Macro Economic Conditions- Decisions of the
firms are made in the broad economic environment.
Like:
Present day economy is undergoing rapid
technological & economic changes.
2 Micro Economic Analysis- It helps in studying
what is going on in a firm how best to use the
available scare resources between various activities
of the firm, how to be technically as well as
economically efficient.
Concepts
Elasticity of demand, marginal cost, short &long run
economies &diseconomies of scale, opportunity
cost, present value, market structure.
Positive vs. Normative Approach
Positive- concerns with what is, was.
Normative- concern with what ought to be. ex. In
setting policy, unemployment ought to matter than
inflation.
 Significance

Provides most of the concepts.

Help in decision-making
Companies become more competent.
 SCOPE
1 Micro Economics
2 Macro Economics
Both applied to business analysis &
decision-making. Business issues to
which economic theories can be directly
applied divided in two categories
Internal issues
external issues
Micro Economics applied to Operational
issues- all internal issues with in the purview &
control of management. Theory of demand,
production, price profit, capital& investment.
Macroeconomics applied to business
environment- Economic, Social, and Political
atmosphere of the country.
Trends in Macro variables general trend in
economy, investment climate
Trade relations with other countries export& import,
fluctuation in international market, Exchange rate.
Govt. policies to control & regulate the economic
activities.
 MANAGERIAL ECONOMICS
& OTHER DISCIPLINE
Managerial Economics is a part of
normative economics as its focus is more
on prescribing choice & action.
Managerial Economics draws on positive
economics by utilizing the relevant
theories as a basis for prescribing choices,
system of logic. Managerial Economics
uses come from economic theory.
Operational Research- after Second World War, in
U.S. interdisciplinary research was conducted to solve
the complex operational problems of planning and
resources allocation in defense and key industries. Team
developed models & tools, which has since grown as
operational research, linear programming, and inventory
models. Economist focuses on maximizing profit
minimizing the cost while operational research focus on
concept of optimization.
Management Theory& Accounting-Maximization of
profit has been regarded as a central concept in the
theory of firm in Micro Economics, Accounting data
&statements constitute the language of business cost
revenue information their classification are influenced
considerable by the accounting.
Mathematical Tools- Business man deals with
concept that is essentially quantitative in nature ex.
Demand, price, cost, product, capital, wages,
inventory. The use of mathematical logic in the
analysis of economic variables provides not only
clarity of concepts but also a systematic framework
with in which quantitative relationships may be
explored.
Statistics- these tools are a great aid in business
decision-making. Statistical techniques are used in
collecting, processing & analysis data, testing the
validity of economic issues with the real economy
phenomenon before they are applied to business
analysis.
Basic Economic Concepts in Decision
Making
These are the concepts of opportunity cost, marginal
analysis and the principles of discounting.
Concept of opportunity cost- When a person
devote his entire time to his own business, he hopes
that he will earn at least as much as he can by
working for someone else. In this case, decision-
making takes into account the cost of opportunities
forgone. The opportunity cost of a decision is
therefore the cost of sacrificing the alternatives; it is
necessary, that the cost of sacrifices involved be
measured. No, sacrifice no costs.
Concept of Marginal Analysis
A technique used in microeconomics by which very
small changes in specific variables are studied
in terms of the effect on related variables and
the system as a whole.
Marginal Costs are the additional costs imposed
when one more unit is produced. If the cost of making
9 pieces of pizza is $90 and the cost of making 10
pieces is $110, the marginal cost of producing the
tenth piece of pizza is $20. It shows the relationship
between production, total costs and marginal costs.
Notice that total costs always rise as production
increases even though marginal costs may not rise.
Concept of Discount
The present value of Rs.1000 available at the
end of two years is less than the present value
of Rs, 1000 available today. The mathematical
technique for adjusting the time value of
money computing present values is called
discounting .e.g. a sum of Rs. 100 is due after
one year, Let the rate of interest 10%:
Discounted value v1 = 100/ ( 1+I )
= 100/ 1.10
= Rs. 90.90
 Questions
Q 1 Calculate an opportunity cost of a
housewife who is M.B.A. and getting pocket
expenses
Rs.2000 per month ?
Present your reply as presentation in front of
class
Q2 Discuss concept of marginal revenue
analysis ? ( discussion among four groups in the
class )
Difference between macroeconomics
and microeconomics

Macroeconomics, is the field of economics that

studies the behavior of the economy as a
whole and not just on specific companies, but
entire industries and economies.
Microeconomics, is the study of decisions that
people and businesses make regarding the
allocation of resources and prices of goods and
services.
Macroeconomics looks at economy-wide phenomena, such
as Gross National Product (GNP) and how it is affected by
changes in unemployment, national income, rate of growth,
and price levels.
For example, macroeconomics would look at how an
increase/decrease in net exports would affect a
nation's capital account or how GDP would be affected by
unemployment rate.

Microeconomics focuses on supply and demand and other

forces that determine the price levels seen in the economy.
For example, microeconomics would look at how a specific
company could maximize it's production and capacity so it
could lower prices and better compete in its industry.