MANAGERIAL

ECONOMICS
NATURE & SCOPE OF MANAGERIAL ECONOMICS
COURSE
This course provides an overview of economic tools and analytic approaches available to
the manager for business decision making. It includes such topics as pricing, forecasting,
demand analysis, production and cost analysis, and macroeconomic policy as it affects
the business environment. The purpose of this course is to develop an economic
perspective that is appropriate for students aspiring to manage business units or entire

DESCRIPTION companies in a wide variety of industries.

Course Credits : 3 UNITS

Course Outcomes:

1. Explain the fundamental of economic managerial and the elasticity of demand and
supply which relates to total revenue.

2. Calculate the profit – maximizing price and output.

3. Analyze The condition for contestable, ramifications for market power and the
sustainability of long-run profits.

4. Manage why networks often lead to first-mover advantages and how to use strategies
such as penetration pricing to favorably change the strategic environment.
 INTRODUCTION TO MANAGERIAL
ECONOMICS

Managerial economics provides us

Economics and Management. In
a basic insight into seeking
other words, it is necessary to
solutions for managerial
understand what these disciplines
problems. Managerial economics,
are, at least in brief, to understand
as the name itself implies, is an
the nature and scope of
offshoot of two distinct
managerial economics.
disciplines:
 Economics is a study of human activity both at individual and national
level.

Adam Smith, the Father of Economics, defined economics as the study of

nature and uses of national wealth’.

Dr. Alfred Marshall, one of the greatest economists of the nineteenth

century, writes “Economics is a study of man’s actions in the ordinary
business of life: it enquires how he gets his income and how he uses it”.
Thus, it is one side, a study of wealth; and on the other, and more
important side; it is the study of man.

The definition given by AC Pigou endorses the opinion of Marshall. Pigou

defines Economics as “the study of economic welfare that can be
brought directly and indirectly, into relationship with the measuring rod
Introduction of money”.

to Economics
Prof. Lionel Robbins defined Economics as “the science, which studies
human behavior as a relationship between ends and scarce means
which have alternative uses”. With this, the focus of economics shifted
from ‘wealth’ to human behavior’.

Lord Keynes defined economics as ‘the study of the administration of

scarce means and the determinants of employments and income”.
Microeconomics

The study of an individual consumer or a firm is called microeconomics (also called

the Theory of Firm ). Micro means ‘one millionth’.
Microeconomics deals with behavior and problems of single individual and of micro
organization.
Managerial economics has its roots in microeconomics and it deals with the micro
or individual enterprises.
It is concerned with the application of the concepts such as price theory, Law of
Demand and theories of market structure and so on.
Macroeconomics
The study of ‘aggregate’ or total level of economics activity in a country is called macroeconomics . It
studies the flow of economics resources or factors of production (such as land, labor, capital, organization
and technology) from the resource owner to the business firms and then from the business firms to the
households.

It deals with total aggregates, for instance, total national income total employment, output and total
investment. It studies the interrelations among various aggregates and examines their nature and behavior,
their determination and causes of fluctuations in the.

It deals with the price level in general, instead of studying the prices of individual commodities. It is
concerned with the level of employment in the economy.

It discusses aggregate consumption, aggregate investment, price level, and payment, theories of
employment, and so on. Though macroeconomics provides the necessary framework in term of
government policies etc., for the firm to act upon dealing with analysis of business conditions, it has less
direct relevance in the study of theory of firm.
Management

Management is the science and art of getting things done through people in
formally organized groups. It is necessary that every organisation be well
managed to enable it to achieve its desired goals. Management includes a
number of functions:
Planning, organizing, staffing, directing, and controlling
. The manager while directing the efforts of his staff communicates to them
the goals, objectives, policies, and procedures; coordinates their
efforts; motivates them to sustain their enthusiasm; and leads them to
achieve the corporate goals.
 MANAGERIAL ECONOMICS

Introduction

Managerial Economics refers to the firm’s decision making process. It could be also interpreted as “Economics of
Management” or “Economics of Management”. Managerial Economics is also called as “Industrial Economics” or
“Business Economics”.
 ▪ Managerial Economics is “the applications
of economics theory and methodology to business
administration practice”.

▪ Managerial Economics bridges the gap between

traditional economics theory and real
business practices in two ways.

Meaning
1. First it provides a number of tools and
techniques to enable the manager to become
more competent to take decisions in real and
practical situations.

& 2. Secondly it serves as an integrating course to

show the interaction between various areas in

Definition
which the firm operates.
Managerial Economics can be defined as amalgamation of economic theory with business practices so as to ease decision-
making and future planning by management.

Managerial Economics assists the managers of a firm in a rational solution of obstacles faced in the firm’s activities.

It makes use of economic theory and concepts. It helps in formulating logical managerial decisions.

The key of Managerial Economics is the micro-economic theory of the firm. It lessens the gap between economics in theory
and economics in practice.

Managerial Economics is a science dealing with effective use of scarce resources. It guides the managers in taking decisions
relating to the firm’s customers, competitors, suppliers as well as relating to the internal functioning of a firm. It makes use
of statistical and analytical tools to assess economic theories in solving practical business problems.
▪ Study of Managerial Economics helps in enhancement of analytical skills, assists in
rational configuration as well as solution of problems.
▪ While microeconomics is the study of decisions made regarding the allocation of
resources and prices of goods and services, macroeconomics is the field of
economics that studies the behavior of the economy as a whole (i.e. entire
industries and economies). Managerial Economics applies micro-economic tools to
make business decisions. It deals with a firm.
▪ The use of Managerial Economics is not limited to profit-making firms and
organizations. But it can also be used to help in decision-making process of non-
profit organizations (hospitals, educational institutions, etc). It enables optimum
utilization of scarce resources in such organizations as well as helps in achieving the
goals in most efficient manner.
▪ Managerial Economics is of great help in price analysis, production analysis, capital
budgeting, risk analysis and determination of demand.
▪ Managerial economics uses both Economic theory as well as Econometrics for
rational managerial decision making.
▪ Econometrics is defined as use of statistical tools for assessing economic theories
by empirically measuring relationship between economic variables. It uses factual
data for solution of economic problems.
▪ Managerial Economics is associated with the economic theory which constitutes
“Theory of Firm”.
▪ Theory of firm states that the primary aim of the firm is to maximize wealth. Decision
making in managerial economics generally involves establishment of firm’s
objectives, identification of problems involved in achievement of those objectives,
development of various alternative solutions, selection of best alternative and finally
implementation of the decision.
The following
figure tells
the primary
ways in which
Managerial
Economics
correlates to
managerial
decision-
making.
Scope of Managerial Economics

Managerial Economics deals with allocating the scarce resources in a manner that
minimizes the cost. As we have already discussed, Managerial Economics is different
from microeconomics and macro-economics. Managerial Economics has a more
narrow scope - it is actually solving managerial issues using micro-economics.
Wherever there are scarce resources, managerial economics ensures that managers
make effective and efficient decisions concerning customers, suppliers, competitors
as well as within an organization. The fact of scarcity of resources gives rise to three
fundamental questions-
▪ What to produce?
▪ How to produce?
▪ For whom to produce?
To answer these questions, a firm makes use of managerial
economics principles.

The first question relates to what goods and services should be produced and in what
amount/quantities.
The managers use demand theory for deciding this. The demand theory examines
consumer behaviour with respect to the kind of purchases they would like
• to make currently and in future;
▪ the factors influencing purchase and consumption of a specific good or service;
▪ the impact of change in these factors on the demand of that specific good or
service;
▪ and the goods or services which consumers might not purchase and consume in
future. In order to decide the amount of goods and services to be produced, the
managers use methods of demand forecasting.
The second question relates to how to produce goods and
services.

The firm has now to choose among different alternative techniques of production. It
has to make decision regarding purchase of raw materials, capital equipment,
manpower, etc. The managers can use various managerial economics tools such as
▪ production and cost analysis (for hiring and acquiring of inputs);
▪ project appraisal methods( for long term investment decisions),etc for making these
crucial decisions.
The third question is regarding who should consume and claim
the goods and services produced by the firm.

▪ The firm, for instance, must decide which is it’s niche market-domestic or foreign?
▪ It must segment the market. It must conduct a thorough analysis of market
structure and thus take price and output decisions depending upon the type of
market.
Managerial economics helps in decision-making as it involves logical thinking.
Moreover, by studying simple models, managers can deal with more complex and
practical situations. Also, a general approach is implemented.
Managerial Economics take a wider picture of firm, i.e., it deals with questions such
as what is a firm, what are the firm’s objectives, and what forces push the firm
towards profit and away from profit.
In short, managerial economics emphasizes upon the firm, the decisions relating to
individual firms and the environment in which the firm operates.
It deals with key issues such as what conditions favor entry and exit of firms in
market, why are people paid well in some jobs and not so well in other jobs, etc.
Managerial Economics is a great rational and analytical tool.
. Managerial Economics is not only applicable to profit-making business organizations, but
also to non- profit organizations such as hospitals, schools, government agencies, etc.
Nature of Managerial Economics

Managers study managerial economics because it gives them

insight to reign the functioning of the organization. If manager uses
the principles applicable to economic behavior in a reasonably,
then it will result in smooth functioning of the organization.
 Managerial Economics is an essential scholastic field. It
can be compared to science in a sense that it fulfils the
criteria of being a science in following sense:

▪ Science is a Systematic body of Knowledge. It is based

on the methodical observation. Managerial economics
is also a science of making decisions about scarce
resources with alternative applications. It is a body of
knowledge that determines or observes the internal
and external environment for decision making.

Managerial ▪ In science any conclusion is arrived at after continuous

experimentation. In Managerial economics also
policies are made after persistent testing and trailing.
Though economic environment consists of human

Economics variable, which is unpredictable, thus the policies made

are not rigid. Managerial economist takes decisions by
utilizing his valuable experience and observations.

is a Science ▪ Science principles are universally applicable. Similarly

policies of Managerial economics are also universally
applicable partially if not fully. The policies need to be
changed from time to time depending on the situation
and attitude of individuals to those situations. Policies
are applicable universally, but modifications are
required periodically.
Managerial Economics requires Art
Managerial economist is required to have an art of utilizing his
capability, knowledge and understanding to achieve the
organizational objective. Managerial economist should have an art
to put in practice his theoretical knowledge regarding elements of
economic environment.

Managerial Economics for administration of organization

Managerial economics helps the management in decision making.

These decisions are based on the economic rationale and are valid
in the existing economic environment.

Managerial economics is helpful in optimum resource allocation

The resources are scarce with alternative uses. Managers need to

use these limited resources optimally. Each resource has several
uses. It is manager who decides with his knowledge of economics
that which one is the preeminent use of the resource.
Continuation....

Managerial Economics has components of microeconomics

Managers study and manage the internal environment of the organization and work for
the profitable and long-term functioning of the organization. This aspect refers to the
micro economics study. The managerial economics deals with the problems faced by
the individual organization such as main objective of the organization, demand for its
product, price and output determination of the organization, available substitute and
complimentary goods, supply of inputs and raw material, target or prospective
consumers of its products etc.
Managerial Economics has components of macroeconomics
None of the organization works in isolation. They are affected by the external
environment of the economy in which it operates such as government policies, general
price level, income and employment levels in the economy, stage of business cycle in
which economy is operating, exchange rate, balance of payment, general expenditure,
saving and investment patterns of the consumers, market conditions etc. These
aspects are related to macro economics.
Continuation....

Managerial Economics is dynamic in nature

Managerial Economics deals with human-beings (i.e. human resource, consumers,
producers etc.). The nature and attitude differs from person to person. Thus to cope
up with dynamism and vitality managerial economics also changes itself over a period
of time.
Managerial Economics and Micro Economics
All the firms operating in the market have to take under consideration the constituent of the economic environment for its
proper functioning. This economic environment is nothing but the Microeconomics elements.

Microeconomics is a broader concept as compare to Managerial Economics.

Microeconomics forms the foundation of managerial economics. Almost all the concepts of Managerial Economics are the
perceptions of Microeconomics concepts.

Managerial economics can be perceived as an applied Microeconomics.

Demand Analysis and Forecasting, Theory of Price, Theory of Revenue and Cost, Theory of Supply and Production are
major bare bones of Microeconomics that underpins the Managerial Economics.

Managerial Economics applies the theories of Microeconomics to resolve the issues of the organization and for decision
making. All Managers want to carry out their function of decision making with maximum efficiency. Their business planning
can be effectively planned and performed with comprehensive knowledge and understanding of micro economic concept
and its applications.

Optimum decision making to achieve the objective of the organization i.e. for profit maximizing or for cost minimizing, is
possible with proper compliance of microeconomic know how, regardless of the technological constraints and given market
conditions. Microeconomic Analysis is important as it is applied to day to day dilemma and concerns.
Managerial Economics And Accounting

Managerial economics is also closely related to accounting, which is concerned with

recording the financial operations of a business firm.
In fact, a managerial economist depends chiefly on the accounting information as an
important source of data required for his decision-making purpose.
for instance, the profit and loss statement of a firm shows how well the firm has done and
whether the information it contains can be used by managerial economist to throw
significant light on the future course of action that is whether the firm should improve its
productivity or close down.
Therefore, accounting data require careful interpretation, reconstruction and adjustments
before they can be used safely and effectively.
It is in this context that the link between management accounting and managerial
economics deserves special mention. The main task of management accounting is to
provide the sort of data, which managers need if they are to apply the ideas of
managerial economics to solve business problems correctly. The accounting data
should be provided in such a form that they fit easily into the concepts and analysis of
managerial economics.
BSAIS 3-3
MASECO