MANAGERIAL ECONOMICS Managerial economics has its roots in

Nature & Scope of Managerial Economics microeconomics and it deals with the micro or
individual enterprises.
I. Introduction to Managerial Economics
It is concerned with the application of the
Managerial economics provides us a basic insight
concepts such as price theory, Law of Demand
into seeking solutions for managerial problems.
and theories of market structure and so on.
Managerial economics, as the name itself implies,
is an offshoot of two distinct disciplines: IV. Macroeconomics
Economics and Management.
The study of ‘aggregate’ or total level of
In other words, it is necessary to understand economics activity in a country is called
what these disciplines are, at least in brief, to macroeconomics.
understand the nature and scope of managerial
economics. It studies the flow of economics resources or
factors of production (such as land, labor, capital,
II. Introduction to Economics organization and technology) from the resource
owner to the business firms and then from the
Economics is a study of human activity both at
business firms to the households.
individual and national level.
It deals with total aggregates, for instance, total
Adam Smith, the Father of Economics, defined
national income total employment, output and
economics as the study of nature and uses of
total investment. It studies the interrelations
national wealth.’
among various aggregates and examines their
Dr. Alfred Marshall, one of the greatest nature and behavior, their determination and
economists of the nineteenth century, writes causes of fluctuations in the (?).
“Economics is a study of man’s actions in the
It deals with the price level in general, instead of
ordinary business of life: it enquires how he gets
studying the prices of individual commodities. It
his income and how he uses it.” Thus, it is one
is concerned with the level of employment in the
side, a study of wealth; and on the other, and
economy.
more important side; it is the study of man.
It discusses aggregate consumption, aggregate
The definition given by AC Pigou endorses the
investment, price level, and payment, theories of
opinion of Marshall. Pigou defines Economics as
employment, and so on. Though macro-
“the study of economic welfare that can be
economics provides the necessary framework in
brought directly and indirectly, into relationship
term of government policies, etc., for the firm to
with the measuring rod of money.”
act upon dealing with analysis of business
Prof. Lionel Robbins defined Economics as “the conditions, it has less direct relevance in the
science, which studies human behavior as a study of theory of firm.
relationship between ends and scarce means
V. Management
which have alternative uses”. With this, the focus
of economics shifted from ‘wealth’ to human Management is the science and art of getting
behavior.’ things done through people in formally
organized groups. It is necessary that every
Lord Keynes defined economics as ‘the study of
organisation be well managed to enable it to
the administration of scarce means and the
achieve its desired goals.
determinants of employments and income.”
Management includes a number of functions:
III. Microeconomics
Planning, Organizing, Staffing, Directing, and
The study of an individual consumer or a firm is Controlling (POSDiCon).
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.

J.T.Manalo
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.
VI. Managerial Economics
Managerial Economics refers to the firm’s
decision making process. It could be also
interpreted as “Economics of Management.”
Managerial Economics is also called as
“Industrial Economics” or “Business Economics.”
VII. Meaning and Definition
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.
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
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
microeconomic 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.
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The following figure tells the primary ways in
which Managerial Economics correlates to
managerial decision-making.
VIII. 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:
1. What to produce?
2. How to produce?
3. For whom to produce?
IX. What 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
behavior 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.
X. How To Produce
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.
XI. For Whom To Produce
 The firm, for instance, must decide which
is it 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.
XII. Managerial Economics Continued
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.
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Managerial Economics is not only applicable to
profit-making business organizations, but also to
non-profit organizations such as hospitals,
schools, government agencies, etc.
XII. 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.
XIII. Managerial Economics is a Science
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.
 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 variable, which is unpredictable,
thus the policies made are not rigid.
Managerial economist takes decisions by
utilizing his valuable experience and
observations.
 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.
XIV. 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.
XV. 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
microeconomics 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
J.T.Manalo
the consumers, market conditions, etc. These
aspects are related to macroeconomics.
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.
XVI. 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.
XVII. 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 show 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.

Microeconomics forms the foundation of It is in this context that the link between
managerial economics. Almost all the concepts of management accounting and managerial
Managerial Economics are the perceptions of economics deserves special mention. The main
Microeconomics concepts. task of management accounting is to provide the
sort of data, which managers need if they are to
Managerial economics can be perceived as an
apply the ideas of managerial economics to solve
applied Microeconomics.
business problems correctly. The accounting data
should be provided in such a form that they fit
Demand Analysis and Forecasting, Theory of
easily in to the concepts and analysis of
Price, Theory of Revenue and Cost, Theory of
managerial economics.
Supply and Production are major barebones 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 microeconomic 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 today dilemma and concerns.
J.T.Manalo