INTRODUCTION TO MANAGERIAL ECONOMICS

Organization: Two or more people who work together in a structured way to achieve a specific
goal or set of goals.
Goal: The purpose that an organization strive to achieve.
Plan: The programme or methods to achieve goals.
Management: The process of planning, organizing, leading and controlling the work of
organization members and of using all available resources to reach stated organizational goals.
Manager: People responsible for directing the efforts aimed at helping organizations to achieve
their goals
Fundamental Resources or Factors of Production:
a. Man
b. Money
c. Material
d. TIME
Economics Defined:
a. Adam Simth defined “economics as the science of wealth”.
b. J. B. Say defined “the study of the laws which govern wealth”.
c. Marshall defined “economics is the study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely connect with the
attainment and with the use of requisites of well being”.
d. Ferguson defined “a study of economical allocation of scarce physical and human
resources (means) among competing ends; an allocation that achieves a stipulated
optimizing or maximizing objectives”.
e. Concluding Definition : “Economics is a social science concerned with the proper
use and allocation of resources for the achievement and maintenance of growth and
stability”.

ECONOMICS
a. Microeconomics is the study of economic action of individuals and small groups. It is
concern with the study of particular firm, particular households, individual prices, wages,
incomes and individual industry etc.
b. Macroeconomics is the study of aggregate or average covering the entire economy such
as total employment, national income, total investment/consumption/savings, aggregate
demand & supply, wage level, general price level and cost structure etc.
Managerial Economics: It should be thought of as “applied microeconomics”. It is defined as
“the discipline which deals with the application of economic theory and decision science tools to
find the optimal solution to managerial decision making problems”.

Difference between ME and Economics

a. Economics deals with the body of principle itself but ME deals with the application of
that principles.
b. Basically ME is microeconomic theory but Economics is both micro and macro.
c. ME, though micro in character, deals only with the firm and nothing to do with individual
but microeconomics as a branch of economics deals with economics of individual and
firm.
d. Under microeconomics different theories viz. wages, interests, profits etc.

Scope of Managerial Economics

a. Demand analysis and forecasting. - like demand determinants, demand forecasting etc.
b. Cost analysis - like cost-output relationship, economies & diseconomies of scale etc.
c. Production and supply analysis. - like production function, law of supply etc.
d. Pricing decisions, policies & practices. - like price determination, pricing methods etc
e. Profit management. - like profit policies, techniques of profit planning etc.
f. Capital management. - like cost of capital, rate of return, selection of projects etc.

1. What is an ECONOMY: MACROECONOMICS

An economy refers to the economic system of an area, region or country. It is system by which
people get a living.
Vital Processes of An Economy:
a. Production
b. Consumption
c. Growth (population, demand, saving, technology, capital)

Five Fundamental Questions

 What is to be produced and in What Quantities?
 How to produce these Goods?
 For Whom are the goods produced?
 How Efficiently are the Resources being Utilised?
 Is the Economy Growing?

2. Economic System: It refers to the mode of production and the distribution of goods and
services within which economic activity takes place. In other words, it refers to the way
different economic elements (individual workers and managers, firms, govt. agencies etc) are
linked together to form an organic world.

Mainly there are three different economic systems – Socialism, Capitalism & Mixed
Economy

3. National Income: Normally it means the total value of goods and services produced
annually in a country. In other words, the total amount of income accruing to a country from
economic activities in a year’s time.

Different concepts of national income are GDP, GNP, NNP, NI, PI, DI,

Gross Domestic Product. The total market value of all final goods and services produced in
a country in a given year, equal to total consumer, investment and government spending, plus
the value of exports, minus the value of imports.

GNP (Gross National Product). GDP plus the income accruing to domestic residents from
productive activities abroad, minus the income earned in domestic markets accruing to
foreigners abroad.

There are two methods to calculate GNP – Expenditure method and Income Method.

It is important to differentiate GDP from GNP.

a. GDP includes only goods and services produced within the geographic boundaries of a
country, regardless of the producer's nationality.
b. GNP doesn't include goods and services produced by foreign producers, but does include
goods and services produced by domestic firms operating in foreign countries.
 WHAT IS THE GDP/GNP OF PHILIPPINES?

4. Inflation: The overall general upward price movement of goods and services in an
economy, usually as measured by the Consumer Price Index and the Producer Price
Index. Over time, as the cost of goods and services increase, the value of a money is
going to fall because a person won't be able to purchase as much with that money as
he/she previously could.

Or in other words, The rate at which the general level of prices for goods and services is
rising, and, subsequently, purchasing power is falling.

Price Index:
Index that tracks inflation by measuring price changes. Examples include the Consumer
Price Index and the Producer Price Index.

Consumer Price Index (CPI): An inflationary indicator that measures the change in the
cost of a fixed basket of products and services, including housing, electricity, food, and
transportation. The CPI is published monthly
also called as cost-of-living index.
Producer Price Index: An inflationary indicator to evaluate wholesale price levels in the
economy, also called as wholesale price index (WPI).

WHAT IS THE CURRENT LEVEL OF CPI AND WPI?

DID YOU NOTICED ANYTHING NEW ABOUT THESE INDICES? Explain.

5. Monetary and Fiscal Policy:

Monetary Policy: The actions of a central bank, currency board, or other regulatory
committee, that determine the size and rate of growth of the money supply, which in turn
affects interest rates.

Fiscal Policy: Decisions by the President and Cabinet, usually relating to taxation and
government spending, with the goals of full employment, price stability, and economic
growth. By changing tax laws, the government can effectively modify the amount of
disposable income available to its taxpayers.

6. Unemployment : An economic condition marked by the fact that individuals

actively seeking jobs remain unhired. Unemployment is expressed as a percentage of the total
available work force.

The level of unemployment varies with economic conditions and other circumstances.
 Underemployment: A situation in which a worker is employed, but not in the desired
capacity, whether in terms of compensation, hours, or level of skill and experience

7. Exchange Rate: Rate at which one currency may be converted into another,
also called as rate of exchange or foreign exchange rate or currency exchange rate.

Basic Economic Theories In Managerial Economics

a. Opportunity Cost Principle
b. Incremental Principle
c. Principle of Time Perspective
d. Discounting Principle
e. Equi-marginal Principle

Opportunity Cost Principle.

It is stated as “the cost involved in any decision consist of the sacrifices of alternatives
required by that decision. If there is no sacrifice, there is no cost”. Thus by the
opportunity cost of a decision is meant that the cost of sacrifice of second best alternative.
Incremental Principle.

It involves estimating the impact of decision alternatives on cost and revenues,

emphasizing the changes in the total cost and total revenue resulting from changes in
prices, products, procedures, investments or whatever may be the conditions.

The Incremental principle may be stated as under:

“A decisions is obviously profitable one if –

i. It increases revenue more than cost.
ii. It decreases some costs to a greater extent than it increases others.
iii. It increases some revenue more than it decreases others.
iv. It reduces costs more than revenues.”

Principle of Time Perspective:

It is stated as “a decision should take into both the short-run and long-run effects on
revenues and costs, and maintain the right balance between the long-run and short-run
perspective”.
Discounting Principle
The process of reducing a future amount to its present value is termed as “Discounting”
because the present value is always less than the future amount; and the interest rate
used is termed as “Discounting rate”.
The principle is stated as “if a decision affects costs and revenues at future dates, it is
necessary to discount those costs and revenues to present values before a valid
comparison of alternatives is possible”.

Equi-marginal Principle
This principle deals with the allocation of the available resources among the alternative
activities.
According to this principle, “an input should be so allocated that the value added by the
last unit is the same in all cases”. This generalization is called as equi-marginal
principle.