UNIT-1

INTRODUCTION TO MANAGERIAL ECONOMICS

Managerial economics, as the name itself implies, is an offshoot of two distinct disciplines:
Economics and Management.
Introduction to Economics
Economics is a study of human activity both at individual and national level. The economists of
early age treated economics merely as the science of wealth. The reason for this is clear. Every
one of us in involved in efforts aimed at earning money and spending this money to satisfy our
wants such as food, Clothing, shelter, and others. Such activities of earning and spending money
are called
“Economic activities”.
It was only during the eighteenth century that 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.
Types of Economics:
1. Microeconomics
The study of an individual consumer or a firm is called microeconomics (also called the Theory
of Firm). Microeconomics deals with behavior and problems of single individual of
organization.
2. 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, labour, capital, organization and technology) It deals with total aggregates, for instance,
total national income total employment, output and total investment.
Introduction to Management
Management is the science and art of getting things done through people in formally organized
groups. It is necessary that every organization 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
Meaning & Definition:
M. H. Spencer Defined “Managerial Economics is the integration of economic theory with
business practice for the purpose of facilitating decision making and forward planning by
management”.
In the words of E. F. Brigham and J. L. Pappas Managerial Economics is “the applications of
economics theory and methodology to business administration practice”.
Q1)Natureand scope of Managerial Economics
(a) Close to microeconomics: Managerial economics is concerned with finding the
solutions for different managerial problems of a particular firm. Thus, it is more close to
microeconomics.
(b) Operates against the backdrop of macroeconomics: The macroeconomics conditions of
the economy are also seen as limiting factors for the firm to operate. In other words, the
managerial economist has to be aware of the limits set by the macroeconomics
conditions such as government industrial policy, inflation and so on.
(c) Normative statements: A normative statement usually includes or implies the words
‘ought’ or ‘should’. They reflect people’s moral attitudes and are expressions of what a
team of people ought to do. For instance, it deals with statements such as ‘Government
of India should open up the economy. Such statement are based on value judgments and
express views of what is ‘good’ or ‘bad’, ‘right’ or ‘ wrong’.
(d) Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the
objectives of the firm, it suggests the course of action from the available alternatives for
optimal solution. If does not merely mention the concept, it also explains whether the
concept can be applied in a given context on not. For instance, the fact that variable
costs are marginal costs can be used to judge the feasibility of an export order.
 (e) Applied in nature: ‘Models’ are built to reflect the real life complex business situations
and these models are of immense help to managers for decision-making. The different
areas where models are extensively used include inventory control, optimization, project
management etc. In managerial economics, we also employ case study methods to
conceptualize the problem, identify that alternative and determine the best course of
action.
(f) ME relating with other subjects: The contents, tools and techniques of managerial
economics are drawn from different subjects such as economics, management,
mathematics, statistics, accountancy, psychology, organizational behavior, sociology
and etc.
(g) Assumptions and limitations: Every concept and theory of managerial economics is
based on certain assumption and as such their validity is not universal. Where there is
change in assumptions, the theory may not hold good at all.
Scope of Managerial Economics or managerial decision areas:
1.Capital Decision: capital refers to it is a initial amount of the organization. Capital refers to
the financial assets, measured in terms of money, used by enterprises to produce their finished
products or to render services to the economy. These include the funds deposited in the accounts
or various funds obtained from various financial sources. Capital is a key component in the
success of the business and on the macro level, for the growth of the economy. The capital can
be generated internally in the form of retained earnings or it can be procured from the external
sources.
2. Purchasing decision: it is also known as make-or-buy decision, is an act of choosing between
manufacturing a product in-house or purchasing it from an external supplier. Make-or-
buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of
producing in-house versus buying it elsewhere.
3. Demand Forecasting decision: Demand forecasting refers to estimation the future demand
for a particular product for a given period of time. A firm can survive only if it is able to the
demand for its product at the right time, within the right quantity. Understanding the basic
concepts of demand is essential for demand forecasting. Demand analysis should be a basic
activity of the firm because many of the other activities of the firms depend upon the outcome of
the demand forecast.
4. Production decision: Production analysis is in physical terms. It refers to conversion of inputs
in to output. Production decisions In decisions on producing or providing products and services
in the market, it is essential that the production of the product or service is well planned and
coordinated, both within and with other functional area of the firm, particularly marketing.
5. Pricing decision: Total value and worth of goods and services is known as Price. Pricing is a
process of fixation of price. Pricing decisions have been always within the preview of managerial
economics. Price theory helps to explain how prices are determined under different types of
market conditions. Competitions analysis includes the anticipation of the response of
competitions the firm’s pricing, advertising and marketing strategies.
6. Profit decision: Profit making is the major goal of firms. There are several constraints here an
account of competition from other products, changing input prices and changing business
environment hence in spite of careful planning, there is always certain risk involved. Managerial
economics deals with techniques of averting of minimizing risks.
7.InvestmentDecision: After received the profit management looking for various investment
avenues to get double benefit. Such as where to invest, when to invest how much amount need
tospend in a particular area. Such as real estate, banksavings, goldpurchasing, and savings in
shares and expand the current business operations.
8. Cost reduction decision: Cost refers to how much amount is required to make a particular
product or service. While the cost analysis is in monetary terms cost concepts and classifications,
cost-out-put relationships, economies and diseconomies of scale and production functions are
some of the points constituting cost reduction analysis.
Q2) Managerial economics relationship with other disciplines/Subjects/areas?
Many new subjects have evolved in recent years due to the interaction among basic disciplines.
Managerial Economics Relationship with other areas/subjects:
1.Managerial Economics and HRM
2.Managerial Economics and Production Management
3.Managerial Economics and Marketing
4.Managerial Economics and Accounting
5.Managerial Economics and Statistics
6.Managerial Economics andOrganizational Behavior
7. Managerial Economics and Operational Research
 1.Managerial Economics and HRM:
HRM refers to it is a process of recruiting the people improving the knowledge and utilizing the
services for the purpose of to meet the organizational goals. Managerial economics can help
personnel management by analyzing the economic and financial aspects of personnel problems
both in relation to the economic welfare of the firm and to the prevailing environment of the
economy as a whole.
2. Managerial Economics and Production Management:
Production is defined as the creation of utility by transforming input into output. It usually refers
to manufacturing activity and the term operations are used to denote a wider meaning,
encompassing all economic activity which creates economic utility. Operations personnel have
four basic responsibilities to fulfill while producing a firm's products or services.
• Supply of quantities,
• Maintenance of time-bound deliveries,
• Fulfillment of quality requirement, and
 • Economizing production operations.
3.Managerial Economics and Marketing:
Marketing refers to it is a social and managerial process which are identifying the customer
needs creating the products and serve to the society. Marketing consist with basic elements such
as product, place, price, promotion, people, process, package and physical evidence. It deals with
How much to sell under given circumstances is answered by an economist and how to sell the
desired amount of output is the domain of the marketing manager.
4.Managerial Economics and Accounting:
 Managerial economics is closely related to accounting. It is recording the financial operation of
a business firm. A business is started with the main aim of earning profit. This goes on the daily
routine work of the business. The buying of goods, sale of goods, payment of cash, receipt of
cash and similar dealings are called business transactions.
5.Managerial Economics and Statistics:
Statistics is important to managerial economics. It provides the basis for the empirical testing of
theory. Mainly used in data analysis. Suppose demand forecasting has to be done. For this
purpose, trend projections are used. Similarly, In managerial economics, measures of central
tendency like the mean, median, mode, and measures of dispersion, correlation, regression, least
square, estimators are widely used.
6.Managerial Economics andOrganizational Behaviour:OB enables the managerial
economist to study and develop behavioral models such as organizational structure,
learningpractices, motivational concepts organizational culture development.
7. Managerial Economics and Operational Research:
Operational Research is closely related to managerial economics. Operational research is the
application of mathematical techniques to solving business problems. It provides all the data
required for business decisions and forward planning. Techniques such as linear programming,
game theory, etc. are due to the works of operational research, linear programming is extensively
used in decision-making. 
Q3)Basic Economic tools or Principles of Managerial Economics?
1. The Opportunity Cost Concept
2. The Incremental Concept
3. Marginilasim
4. Concept of Time Perspective
5. Risk and Uncertainty
1. The Opportunity Cost Concept:
The best next alternative cost is known as opportunity cost. In Managerial Economics, the
opportunity cost concept is useful in decision involving a choice between different alternative
courses of action. Resources are scarce; we cannot produce all the commodities. Opportunity
cost of a decision is the sacrifice of alternatives required by that decision. Opportunity cost,
therefore, represents the benefits or revenue forgone by pursuing one course of action rather than
another.
2. Marginal Incremental Concept:
The incremental concept is probably the most important concept in economics and is certainly
the most frequently used in Managerial Economics. Incremental concept refers to increase the
production volumes with increase the inputs ratio in in all the areas. Such as manpower, material,
machinery and money.is closely related to the marginal cost and marginal revenues of economic
theory.
The two major concepts in this analysis are incremental cost and incremental revenue.
Incremental cost denotes change in total cost, whereas incremental revenue means change in
total revenue resulting from a decision of the firm.
3. Concept of Marginilasim: It refers to additional outputwithusage of additional efforts.
Management getting the outputwithout purchasing of new inputs. Output volumes are increasing
with the help of motivating the employees, maximum utilization of machinery and plant layout.
4. Concept of Time Perspective:
The time perspective concept states that the decision maker must give due consideration both to
the short run and long run effects of his decisions. He must give due emphasis to the various time
periods. It was Marshall who introduced time element in economic theory.In the short period, the
firm can change its output without changing its size. In the long period, the firm can change its
output by changing its size.
5.Risk and Uncertainty:
Managerial decisions are actions of today which bear fruits in future which is unforeseen. Future
is uncertain and involves risk. The uncertainty is due to unpredictable changes in the consumer
perceptions, competitor’s strategies, structure of the economy and government policies. This
means that the management must assume the risk of making decisions for their institution in
uncertain and unknown economic conditions in the future. Firms may be uncertain about
production, market prices, strategies of rivals, etc. Under uncertainty, the consequences of an
action are not known immediately for certain.

Q4).Role and Responsibilitiesof Managerial Economist

Managerial economist is a person who is able to offer suggestions to top level management and
who manages business efficiently using various economic theories and methodologies. He
supports the management team in better decision making through his analytical skills and
specialized techniques.

A Managerial Economist is also termed as an economic advisor or business economist. He is

responsible for analyzing various internal and external environmental forces that influence the
functioning of business organizations. Managerial Economist always remains in touch with all
the latest economic developments and environmental changes for informing the management.
Managerial Economist -Role and Responsibilities:

1. Studies Business Environment

2. Analyses Operations Of Business
3. Demand Forecasting And Estimation
4. Production Planning
5. Performing Investment Analysis
6. FocusesOn Earning Reasonable Profit
7. Maintaining Better Relations
1.Studies Business Environment:
The managerial economist is responsible for analyzing the environment in which business
operates. Proper study of all external factors that affect the functioning of organization is must
for proper functioning. He studies various factors like growth of national income, competition
level, price trends, phase of the business cycle and economy and updates the management
regarding it from time to time.

2. Analyses Operations Of Business:

He analyses the internal operation of business and helps management in making better decisions
in regard to internal workings. Managerial economist through his analytical and forecasting skills
provides advice to managers for formulating policies regarding internal operations of the
business.

3. Demand Forecasting And Estimation:

Proper estimation and forecasting of future trends helps the business in achieving desired
profitability and growth. Managerial economist through proper study of all internal and external
forces makes successful forecasting of future uncertainties or trends.

4. Production Planning:
Managerial economist is responsible for scheduling all production activities of business. He
evaluates the capital budgets of organizations and accordingly helps in deciding timing and
locating of various actions.
5. Performing Investment Analysis:
A managerial economist analyzes various investment avenues and chooses the most appropriate
one. He studies and discovers new possible fields of business for earning better returns.
6. FocusesOn Earning Reasonable Profit;
He assists management in earning a reasonable rate of profit on capital employed in the business.
Managerial economist monitors activities of organizations to check whether all operations are
running efficiently as per the plans and policies. 

7. Maintaining Better Relations:

A managerial economist maintains better relations with all internal and external individuals
connected with the business. It is his duty to develop a peaceful and cooperative environment
within the organization and aims to reduce any opposition taking place.