Module 1: FUNDAMENTALS OF MANAGERIAL ECONOMICS

Learning objective: learners will be able to understand the concept of Managerial

economics, its scope and nature, types and its limitations in relation to their previous
background on the basic concept of Economics.

Moving to the higher discipline of Managerial economics it is essential for the learners to revisit
their basic knowledge on the definition of the concept of ECONOMICS. The science of
economics begins with a simple assumption: human wants are unlimited and insatiable, but
resources are limited. While this assumption may not always be true, it does, nonetheless, yield
useful insights into how economies work. And if human wants are unlimited, then surely not
enough economic resources exist to fulfill those wants entirely, which is why economic
resources are often described as scarce resources. Since scarce resources can only produce so
much, people must decide about what they want and how much they are willing to pay for it.

Definition of Economics

Economists describe goods and the products and services that people want and services as having
utility, meaning that they must provide some satisfaction. Hence, the goal of all economic
activity is to fulfill the wants of the people. People, businesses, and governments all have wants.
However, the wants of people, businesses, and governments are too many and that resources are
limited and should be allocated. Given this condition, we can define Economics as a social
science concerned with the production, distribution, and consumption of goods and services. It
studies how individuals, businesses, governments, and nations make choices about how to
allocate resources.

Definition of Managerial Economics

Economics is an inevitable part of any business organization .All the business assumptions,
forecasting and investments are based on this one single concept whether they are profitable or
non profitable.
Managerial Economics is a discipline that deals with the application of economic theory to
business management. It deals with the use of economic concepts and principles of business
decision making. Formerly it was known as “Business Economics” but the term has now been
discarded in favor of Managerial Economics.
When you apply important aspects of economic principles, theories, tools, and approaches to
solve practical problems in your business, you’ve applied managerial economics. As Mark
Hierschey describes in his book Managerial economics helps students on how to use common
sense to understand business and solve managerial problems without the use of calculus. This
eases decision making and fast-tracks employee-employer relationships in a way that it helps
boost the company’s growth.

Activity 1; Let’s Play Name that Logo; please refer to the attachment of this module .

TYPES OF MANAGERIAL ECONOMICS

Depending on the purpose for which you want to use it in your organization, managerial
economics could come in many ways. If to use it to solve the problem of customer service
delivery is your concern, managerial economics can be deplored. How about employee
motivation to improve output and delivery?

In any case, it will go a long way to add value to the way you do business and would lead to an
increase in your ROI.

Below are the different types of managerial economics that we can use for business, whether it’s
a profit-making firm or a non-profit one.

1. Normative Managerial Economics

This aspect of management is unique and takes into consideration the idea that a practical
solution to managerial problems is given. It places emphasis on the fact that the decision making
of an organization be viewed from the point of true happenings, rather than be based on theories
alone.. When using this type of managerial economics, you don’t treat it as administrative issues
through only analysis. You do so using practical, real-life situations. Such important issues as
forecasting, cost management, recruitment, product design and promotion are given a practical
approach that enhances decision making and the general administrative responsibilities of an
organization. Here’s a breakdown of how each of the types of nominative managerial economics
affects forecasting, cost management, recruitment, product design, and promotion. Because
forecasting helps to see ahead of the nature of business operations and decisions, it’s easy to
solve any problem that arises when a practical approach is used. With this in mind, the
organization would be able to cut costs when problems are detected on time because they’d be
quickly attended to before they grow bigger and harder.
When an organization recruits the best in a particular field, jobs will be done effectively. As a
result, you’d not only produce the best product, promoting it will be practical and result-driven
because there’s a standard approach to its production.

2. Liberal Managerial Economics

In this context, your organization operates based on market forces and trends. People, your
customers have the freedom to buy what they want and need in the market at any given point in
time.

They make their own choices and buying decisions by going for whatever they want. So it befits
your organization to study customer behavior through adequate data analysis that helps you
determine how you respond to your customers’ needs.

This is where your organization’s management comes in. You put in place a good plan to ensure
customer satisfaction.

3. Radical Managerial Economics

In order to beat competitions by meeting customer satisfaction, there is a need to ensure that a
practical and goal-driven approach is enforced. This would mean the management going out of
their way to plan and strategize the best method of meeting set goals.

And what this means is that to achieve this, management would have put aside the need for profit
maximization as they focus on customer satisfaction. This makes sense as satisfying the
customers’ means generating leads. And this set of people will eventually become returning
customers from which your organization can continue to generate profit.

Now let’s go on to the next point, the principles of managerial economics, which could also
mean the example of managerial economics.

PRINICIPLES OF MANAGERIAL ECONOMICS

Showing how the principles of managerial economics are deplored to solve real-life problems is
the best way to understand the relationship between management and economics.

We’re going to look at the three core principles. Not only that, but we’ll also explain the sub-
ideas and functions under each of them.
The three major principles we’ll look at are:

A. The principles of decision making

B. The principles of business communication
C. The principles of economic functions

1. The Principle of Decision Making

This involves the way people go about their businesses and the different decision making
processes that help them make informed decisions about certain products and services.

● The Choices Made: In order to meet up with the standard set by an organization,
you have to decide if doing business with them is favorable to both of you. In
this way, there’ll be a series of options to choose from. Then if people like they
can freely choose any aspect of the business that suits them.
● Opportunity Cost: This is part of the decision making that influences people’s
choices. When there are a lot of options to choose from, people tend to go with
the most convincing.
● The Gains: Before you can convince people to consider engaging in your
business, you’d do more than just putting the products right in front of them.
That may have some effect. But the real benefit is in letting them see what’s
really in it for them when they get involved.
● Attraction Point: When people get positive incentives with an offer, they jump
at it

2. Principles of Business Communication

Communication is key to the success of every business. This is why it’s an important principle
that affects the success or otherwise of any business.

● Win-win Situation: Participation in a business transaction gives mutual benefits.

As an exchange culture, both parties have something to gain. When businesses
and organizations create products and offer services, the customer in turn needs
those products or services.
 ● Economic Relationship: An atmosphere where relationships can be formed and
people can interact for mutual gains is essential for growth. A market is often
where the producers and consumers meet for a successful business transaction.

● Government Intervention: Whenever there’s an unfavorable policy for

businesses, the government often sets in by communicating with stakeholders to
jointly work out the best solution to the problem.

3. The Principles of Economic Functions

No doubt about it, the economic situation of a country has an effect on the business activity of
any organization such as:

● Improved Living Standard: Business activities which involve selling and buying
and offering of services often boost the economy of a country. When businesses
meet consumer needs and there is a thriving atmosphere for trading activities,
the economy booms.
● Curbs Inflation: When there’s too much money in circulation, inflation sets in.
People’s purchasing capacity increases and the prices of goods would increase
astronomically. And this would happen when those producing aren’t able to
meet consumers’ demand.
● Economic Stability Efforts: When there is inflation in the country, the
government intensifies effort to roll out policies that would stabilize the
economy. This is key as an aspect of managerial economics.

Next is to look at the nature and scope of managerial economics.

NATURE OF MANAGERIAL ECONOMICS

The following forms of nature show us how it affects people with regard to decision making.

1. Scientific -- Managerial economics is scientific in approach because it handles real-life

situations in a well-calculated manner. Just like science, it goes through the essential
 processes of methodical observations, continuous experimentations, and application. In this
way, policies formulated that carefully go through these steps often render the final decision
solid and really applicable.

2. As an Art -- As an art, managerial economics combines proven knowledge and strategies by

analyzing the theoretical ideas that form decisions. This is deplored in a step by step way to
achieve organizational objectives.

3. Administrative -- In order to come up with ideas that help in decision making for the
organization, managerial economics helps in making decisions that are right for the business
environment and fitting for administrative responsibilities.

4. Resource Control -- It is often deplored when ensuring proper management of available

resources. With several options to choose from the number of resources provided such as
information, human, capital, and technological, for effective management, the manager looks
at the most fitting ones.

5. Micro-economic -- In order to solve problems relating to the organization’s objectives,

product demand, price determination, and supply of goods produced, the manager ensures that
everything is in place. He analyses the internal environment of the organization to see the best
practices for success.

6. Macroeconomic -- The external environment of any business often affects its decision-
making process. Important decisions bothering on government policies, price determination,
state of the economy, exchange rate, and other market conditions usually influence the steps
taken by the manager.

7. Dynamic -- In general, management is a dynamic affair. With differences in human

preferences, there is usually a constant change in decisions made.

8. Multidisciplinary -- It is the combination of several ideas from different disciplines such as

mathematics, statistics, finance, human resource, marketing, etc. that forms the decision-
making process.

9. Prescriptive -- The management of an organization deals in achieving a certain goal. So all

the ideas formulated and steps taken to determine the level of success recorded.

10. Management-driven -- What this means is that it is largely a pragmatic approach. It makes
use of real-time situations.

Now, the next thing is to briefly check out the scope of managerial economics.
SCOPE OF MANAGERIAL ECONOMICS

The scope is as follows:

1. Analysis of Demand and Forecasting

This means that producers often minimize their production output based on market demand.
With this, it becomes necessary for an organization to have a production schedule before going
ahead to roll out products.

Demand analysis assists the organization in maintaining market share with its competition and
this would result in an increase in profit.

2. Analysis of Cost and Production

One of the key functions of a manager is to look into the cost figures of output. He also finds out
the costs of production and sees if it meets up with the total expected income. In ensuring that
the necessary information is identified, he works on the most fitting pricing policy based on the
cost of production and market value.

3. Pricing

As a scope of managerial economics, the pricing determines demand and how consumers react to
products. This comes after doing a thorough market analysis.

4. Profit Management

As the goal of your organization is to maximize profit, this is part of the scope of management in
which the manager finds a balance between cost estimates and profit generation. When a
manager is able to reduce uncertainty, the firm makes more profit.

5. Capital Investment
Managing capital is a very important function of management that’s key to success. The
investment could come in different forms like equipment, technology, skills, and information.
This would affect project selection, cost of capital, and the Return on Investment.

Having discussed the scope, let’s go on to the limitations of managerial economics.

LIMITATIONS OF MANAGERIAL ECONOMICS

1. Unpredictable

Because economic activities are based on human behaviors, it is prone to errors. The combined
process of producing, distributing, and consuming goods and the rendering of services is
connected to human activities which could sometimes be unpredictable.

2. Non-replicable

Most of the times, predicting market behaviors is not easy. That’s why using the same method
over and over again would not work as there is no specific solution that could meet up with what
earlier happened in the market.

3. No Unified Solution

In trying to address an economic situation in the country, different economic managers will be
tasked with coming up with the solutions. Even when they work together, they can hardly come
up with the same conclusions. So their predictions about how the market will react to the
problems may not work as expected.

4. Open to Political Manipulation

Political economists are among many people given to criticism of the process of decision
making. Using normative economics, politicians often call for changes in policies which if
closely looked at, are for their gain.
 5. Inaccurate Conclusion

Most theories often put forward by economic experts to forecast future policies that sometimes
contradict one another.

You might have a question about the difference between managerial economics and business
economics, how managerial economics differs from economics, and the techniques of
managerial economics.

While managerial economics deals with the theoretical application of management using
statistics, business economics uses quantitative methods to analyze the difference in
organizational structures and the relationship of companies.