Managerial Economics:

Define:

Different authors have defined the term Managerial economics in different ways but definition of
Spencers and silgelman is self explanatory.

According to them “ Managerial economics is the integration of economic theories with the business
practices for the purpose of facilitating decision making and forward plan by management”.

Collectively “Managerial economics analyses the process through which the manager uses economic
theories to address the complex problems of the business world, and then take rational decisions in
such a way that the pre conceived objectives of the concerned firm may be attained”

Scope of Managerial economics:

Managerial economics gains its scope when economic concepts are applied to business management for
effective decision making. Managerial economics proves in scope in five categories effectively.

1. The Demand analysis.

2. Cost analysis
3. Production Analysis
4. Market structure.
5. Pricing methods.

Apart from these there are few other fields where managerial economics gains importance such as
Capital Budgeting, Performance appraisal and other Management concepts.

Whenever someone wants to start a business or launch a product, he/she should definitely find out
whether the product is demanded or not. The next step is to analyze if cost of production is feasible or
not. Once we are satisfied with the cost and budgeting, we have to frame the production schedule
based on the model, style and requirement by the customer. After producing the product, it is the duty
of the firm to fix the price of the product, not only considering the cost of production but also the
market condition. Once the price is fixed, incurring the cost factor and required profit margin, effective
marketing is required. Thus there are five stages in business that require managerial economics as
indigenous factor.

1. The Demand Analysis: The demand factor is inevitable for any business for which managerial
economics has included number of concepts such as law of demand, elasticity of demand,
demand determinacy and how to forecast the demand for the existing product but also for the
new product.
2. The Cost Analysis: Cost analysis includes all types of cost concepts along with the cost of capital,
constructing the cost function( cost-output relationship) for short term as well as long term is
 needed to construct the cost budget. A cost function expresses the relationship between the
cost of production and the level of output.
3. The Production Analysis: The production function expresses the technological or engineering
relationship between the output of commodity and its factor input namely land, labor, capital
and organization. It also includes production theories such as laws of variable proportions and
law of return to scale.
4. Pricing Methods: there are different methods of pricing based on the business situation. The
type of pricing will differ. Some of the pricing methods are skimmed pricing, penetrating pricing,
differential pricing, shadow pricing, targeted pricing etc. Once the prices are framed for the
product, it should be marketed effectively to get back the invested capital through sales
revenue.
5. Market structure: Analysis of market structure and competition is very important for marketing
a product. The type of competition varies with time and market such as
a. Perfect competition
b. Monopoly Competition
c. Monopolistic Competition
d. Oligopoly Competition.

Scope of
Scope of
Managerial
Economics
Economics

Production
Production
Demand
Demand Analysis
Analysis Cost
Cost Analysis
Analysis Pricing
Pricing Methods
Methods Market
Market Structure
Structure
Analysis
Analysis

1.production
1.production
1.Law
1.Law ofof 1.Differential 1.Perfect
1.Differential theories
theories 1.Skimmed
1.Skimmed Pricing
Pricing
Demand
Demand cost
cost concepts
concepts 2. 2.Penetrating competition
2. 2. laws
laws of
of 2.Penetrating
2. Elasticity
Elasticity of 2.Cost
2.Cost of
of capital variable prcing
prcing 2.Monopoly
Demand variable
Demand proportions 3.Differential
3.SAC
3.SAC proportions 3.Differential 3.Oligopoly
3.Demand
3.Demand pricing
pricing
4.LAC
4.LAC 3.law
3.law ofof return
return
Determinance
Determinance 4.
4. Shadow pricing.
Shadow pricing. 4.Monopoilisti
to
to scale
scale
4.Demand 5.Cost
5.Cost 5. targeted pricing.
pricing. c competition.
4.Demand 4.Economies to 5. targeted
forecasting. Budgeting.
Budgeting. 4.Economies to
forecasting. sscale
sscale

Fundamentals of Managerial economics:

The managerial economics consists of 5 fundamental concepts namely

1. Incremental principle
 2. Principles of time perspective
3. The opportunity cost principle
4. Discounting principle
5. Equi-marginal principle.

Incremental
principle

Principle of
Oppurtunity
time
cost principle
perspective

Fundamentals
of M.E

Equimarginal discounting
Principle Principle

The basic concepts of M.E are otherwise called the fundamentals of business economics. There are 5
fundamental principles to analyze and understand the business values.

Opportunity cost principle: The opportunity cost principle refers to the cost or the revenue incurred or
enjoyed from the alternative. In simple words, the opportunity cost is the cost of the alternative solution
which was not implemented on resolving an issue. For example, there are 2 options A and B for business
decision. Opportunity cost is the cost of A when B is chosen as the right solution.