NATURE, SCOPE,

AND METHODS
OF MANAGERIAL
ECONOMICS
By:
Jezreel Jeanne A. Millana
Ken-Aldrich R. Sanz
Presentation Outline
I. To introduce and define managerial economics
II. To outline the types of issue which are addressed by managerial economics
III. To explain the difference between positive and normative economics
IV. To explain the relationship between managerial economics, economic theory and the decision
sciences
V. To explain how managerial economics is related to other disciplines in business, such as marketing
and finance
VI. To identify the main subject areas in managerial economics, explain how they are related to each
other, and describe how they are organized and presented in text
VII. To explain the methods used in the development of scientific theories and show their relevance to
managerial economics
VIII. To explain how economic theory is presented from a pedagogical viewpoint and how this relates
to the organization and presentation of the material in the text.
Case Study 1.1: Global Warming
Questions:
1. What was the objective of this case study
in the managerial economics perspective?
2. How can we approach the problems of
conflicts of interest between different
countries and between different
consumers and producers?
I. MANAGERIAL ECONOMICS?
The application of economic theory and methods to business
decision-making.
A means to an end by managers, in terms of finding the most
efficient way of allocating their scarce resources and reaching
their objectives.

HOW IS MANAGERIAL ECONOMICS INTEGRATED IN

BATTLING GLOBAL WARMING? *Hint: Effectiveness and
Efficiency
II. MANAGERIAL ECONOMICS HELPS WHO?
SOMEONE MAKING DECISION
GOVERNMENT
COMPANY
STUDENT
EMPLOYEE
SOMEONE CHOOSING THE BEST OPTION
III. POSITIVE vs. NEGATIVE
Neoclassical framework
 Wherein the aforementioned theories are examined and largely discussed
 An approach that treats the individual elements within the economy (consumers, firms, and
workers) as rational agents with objectives that can be expressed as quantitative functions (utilities
and profits) that are to be optimized, subject to certain quantitative constraints

**Difference between microeconomics and managerial economics:

1. Microeconomics is often descriptive
> Explains how markets work and what firms do in practice
2. Managerial economics is often prescriptive
> States what firms should do in order to reach certain objectives
**Difference between positive and normative economics:
1. Positive statements are factual statements whose truth or falsehood can be verified by
empirical study or logic; it does not involve any value judgement
e.g.1 The distribution of income in the UK is unequal.
e.g.2 Governments should make use of market forces in order to achieve a more efficient
solution in terms of reducing air pollution.

2. Normative statements involve a value judgement and cannot be verified by empirical

study or logic, often imply a recommendation
e.g.1 The distribution of income in the UK is inequitable.
e.g.2 World government should aim to reduce pollution by 90% in the next ten years.
IV. MANAGERIAL ECONOMICS AND
ECONOMIC THEORY
Microeconomics
 The branch of economic theory with which managerial economics is related
 Deals with how markets work
 Study of individuals, households and firm’s behavior in decision making and allocation of resources
**Relevant aspects of microeconomic theory:
1. Theory of the firm – business exists and make decision to maximize profit
2. Theory of consumer behavior (demand) – consumers allocate resources to maximize utilities
3. Production and cost theory (supply) – cost determines price
4. Price theory – price is determined by demand and supply
5. Market structure and competition theory – refers to numbers of firms supplying a market and
relationships among the firms
IV. MANAGERIAL ECONIMICS AND DECISION SCIENCES

**The most important aspects of decision sciences in the analysis

used in managerial economics:
1. Numerical and algebraic analysis
2. Optimization
3. Statistical estimation and forecasting
4. Analysis of risk and uncertainty
5. Discounting and time-value-of-money techniques
V. MANAGERIAL ECONOMICS AND BUSINESS FUNCTIONS

**Units of a firm:
1. Production and operations
2. Marketing
3. Finance and accounting
4. Human resource
* Share your experience on how did you relate economics in your business or employment
NOTE:
1. There are some areas of decision-making where the tools and techniques of managerial
economics are not applicable.
2. Managerial economics tends to focus more on behavioral aspects when they concern
consumers rather than when they concern the behavior of employees.
 VI. ELEMENTS OF MANAGERIAL ECONOMICS
1. Main subject areas and relationships: 2. Presentation of Topics
Pricing
> Is the central core of managerial economics,
considering demand and supply forces
Supply forces
> Is discussed under the theory of costs
Demand forces
> Consider consumer theory
Costs
> Consider production theory
Consumer theory
> Is included in demand theory
 Managerial Economics discusses the interrelationships
of various theories in formulating appropriate
government policies.
VII. SCIENTIFIC DEVELOPMENT METHODS
**2 aspects of methods:
1. The methods that professionals use to develop the subject
2. The methods used to present material to students learning the subject

**A scientific theory does two things:

1. It describes or explains relationships between phenomena that we observe.
2. It makes testable predictions.

Empirical study
 Is required when a hypothesis needs to be tested
 Involves real-world observations
**2 types of studies:
1. Experimental studies
> Involve a situation where the investigator can control the relevant variables to isolate the variables
under investigation and keep other factors constant.
> Is often done in laboratory conditions (usually impossible in business and economic situations).
2. Observational studies
> The analysis of the data in the study involves statistical techniques such as regression analysis, and
then inferences are drawn from this regarding the initial theory, in terms of its acceptance or rejection.

Econometrics
 Refers to the whole process of testing economic theories.
 **Characteristics of a good theory:
1. It explains existing observations well.
2. It makes accurate forecasts.
3. It involves mensuration, meaning that
the variables involved can be measured
reliably and accurately.
4. It has general application, meaning that
it can be applied in a large number of
Theory emerges from an educated presumption, then, different situations, not just a very
examined through collection of data from actual limited number of cases.
experiences and observations, then, analyzed and
interpreted, then, determines acceptance or rejection of the 5. It has elegance, meaning that the
statement.
theory rests on a minimum number of
assumptions.
VIII. ECONOMIC THEORY IN TEACHING
PERSPECTIVE
1. Build MODEL to represent a system using diagrams, graphs or
equations.
2. Perform analysis with models and conclusions drawn.
3. Formulate necessary assumptions.
Tools of Analysis
Demand
> refers to the quantities that people are or would be willing to buy at different prices during a given time period, assuming
that other factors affecting these quantities remain the same.
> There is generally an inverse relationship between the quantity demanded and the price charged, as shown in a
downward-loping demand curve, a function, or an equation.
 Customer tastes of products and services are a fundamental factor.

Supply
> refers to the quantities that people are or would be willing to sell at different prices during a given time period, assuming
that other factors affecting these quantities remain the same.
> The costs of production are the most important in determining the supply relationship
> Generally, there is a direct relationship between the quantity supplied and the price offered, with more being supplied the
higher the price.
> In labor market, supply is more complex.
Case Study 1.2: Import quotas on Japanese
cars

Questions:
1. Why would the Japanese car manufacturers
be willing to co-operate with the limiting of their
exports to the United States?
2. One study estimated the cost of the quotas at
$160,000 per job saved. In view of this, why do
you think the quotas were implemented?
Business articles
“2020 global GDP growth projections have gone haywire
during pandemic”
(5 October 2020, Abhijit Mukhopadhyay)
https://www.orfonline.org/expert-speak/2020-global-gdp-growth-
projections-have-gone-haywire-during-pandemic-74583/?amp

PEZA firms receive P50-B tax perks annually – NEDA study

(8 October 2020, Bernie Magkilat)
https://mb.com.ph/2020/10/08/peza-firms-receive-p50-b-tax-perks-
annually-neda-study/