Managerial Economics (lecture 1)

Course Code: MGT-604

Mohammed Rafiqul Islam
Assistant Professor Department of Management
Jatiya Kabi Kazi Nazrul Islam University Trishal, Mymensingh, Bangladesh.

Economics
•Economics comes from the ancient Greek word “oikonomia.”

•Oikonomia literally translates to “the task of managing a household.”

• Economics is 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.

• Various old definitions of economics can be grouped together under three heads like

1.wealth definition;

2.welfare definition

3.scarcity definition

Economics as a Science of Wealth

• Adam Smith (1723-1790)

• Father of Economics

• Wealth of Nation (1776)

Economics enquires and analysis the factors that determine wealth of the country and growth of the
volume of the production.

• Alfred Marshall,

• English economist,

• 'Principles of Economics' (1890).

• 'Economics is the study of mankind in ordinary business of life. It examines that part of individual and
social action, which is closely connected with the attainment, and the use of material requisites of well-
being. It is on the one side a study of wealth, and on the otherand more important side, a part of the study
of man'.

Economics as a Science of Scarcity

• Professor Lionel Robbins
 • London School of Economics

• 'An Essay on the Nature and Significance of Economic Science‘ (1932)

• 'Economics is the science which studies human behavior as a relationship between ends and scarce
means which have alternative uses'. This definition of economics has gained a worldwide popularity and
consensus among the economists.

Approaches to Economics

No Basis of Classical approach Neo-classical Modern approach

Comparison approach
1. Nature of study Economics is a Economics is a scienceEconomics is a
science of wealth. of material welfare. science of human
behavior.
2. Aim of human To maximize wealth To maximize material To maximize
beings welfare pleasure or
satisfaction
3. Role of wealth Wealth is an end in Wealth is a means for Wealth is a scarce
itself. material welfare. resource to maximize
satisfaction.

4. Scope of the study It considers the concept It considers the It is pervasive and is
of economic man only concept of people applicable to all
living in organized people, living in a
society only. society or in isolation.

Fundamental Problems Discussed in Economics

• What to Produce?
• How to produce?
• Whom to Produce?
• How to achieve fuller utilization or full employment of resources?
• How to achieve growth of resources?

What to Produce?
• An economy endowed with limited resources and unlimited wants have to make a choice about what
good to produce and in what quantities. If an economy decides to produce more of consumer goods, it
has to produce less of the capital goods. There always exists tradeoff between various uses of the precious
limited resources. If resources were not limited, the problems would not arise because in that case we
would be able to produce all goods we wanted in desired quantities. Hence, the goods and their quantity
to be produced has to be prioritized by the economy.
How to Produce?
• The question of how to produce is related with the use of which resource to use in the production
process. It connects to the question of technique of production in an economy and is concerned with
producing the maximum output at the least cost. The same goods and services can be produced using
more labor (labor intensive technique) or using more capital (capital intensive technique). An economy
has to use that method of production which gives the maximum output at the least production cost.

Whom to Produce?
• After deciding on what to produce and how to produce, an economy has to decide on the distribution
of the produced goods and services to different sections of the society. It has to decide how the national
product be distributed among different factors of production or among different individuals and families.

How to achieve fuller utilization or full employment of resources?

• Economies have to decide how to optimize the resource use so that maximum output can be produced
efficiently. Every economy is plagued by the problem of scarcity of resources in relation to the unlimited
wants. Hence, idle resources are a curse for every economy. In order to satisfy the demand of the economy
full utilization of resource must be ensured.

How to achieve growth of resources?

• Another central problem of the economy is to increase the level of production. It is also known as the
problem of growth of resources. Each economy is faced with the problem of how to increase its
production capacity so that the total production can be increased. An economy can achieve the objective
of growth of resources through technological advancement.

Classification of Economics
• The Modern analysis of economics divides the area of study of economics into two parts namely-

• Microeconomics and

• Macroeconomics.

Microeconomics
• Microeconomics deals with the behavior of individual units of the economy like individual consumer,
individual producer, individual market, individual industry etc. Microeconomics is the microscopic study
of the economy.

• According to K.E. Boulding, 'Microeconomics is the firms, particular households, individual prices,
individual industries, particular commodities'.

Macroeconomics
 • Macroeconomics is concerned with the study of the economy as a whole. It gives the big picture of the
large macroeconomic variables like production, consumption, investment, savings, interest rate etc.

• In the words of K.E. Boulding, 'Macroeconomics deals not with individual quantities but with aggregate
of these quantities, not with individual incomes but with national income, not with individual prices but
with price level, not with individual output but with national output'.

Basic Differences between microeconomics and macroeconomics

No. Basis of Differences Microeconomics Macroeconomics

1. Economic unit Microeconomics is concerned with the Macroeconomics is concerned with the
study of individual units of an economy. study of aggregate units of an
economy.
2. Objective Microeconomics is concerned with the use of Macroeconomics is concerned with the
scarce means to achieve maximum objectives of full employment, price
satisfaction. stability, economic growth and
favorable
3. Methodology Microeconomic theories are based on the Macroeconomic theories are not based
BOP.
on such assumptions. Hence it is known as
'ceteris paribus' or all other things being equal
assumption. Hence, it is known as partial general equilibrium analysis.
analysis.
4. Components of equilibrium The demand and supply forces interact The Aggregate demand and
to create an equilibrium price. Aggregate supply interact to reach
the general
5. Theories Price theory, Theory of value Theory of output, income and employment
equilibrium.
6. Examples of variables Price, demand, supply etc. National income, National output,
General Price Level, Full Employment etc.

Managerial Economics
• Managerial economics is a subject that was first introduced by Joel Dean in 1951. This branch of
economics is essentially concerned with the application of various economic concepts in decision-making.

• “Managerial economics is concerned with the application of economic concepts and economic analysis
to the problems of formulating rational managerial decisions.”- Edwin Mansfield, Economics Professor,
University of Pennsylvania

• Managerial economics is defined as the branch of economics which deals with the application of
various concepts, theories, methodologies of economics to solve practical problems in business
management. It is also reckoned as the amalgamation of economic theories and business practices to ease
the process of decision making. Managerial economics is also said to cover the gap between the problems
of logic and problems of policy.
Examples

• Managerial economics finds its use in deciding the price of a product.

• It also helps firms to decide on the manufacturing of a product or to purchase it

• To decide on the production technique to be used in the manufacturing of a

• It also helps in inventory management. A firm can decide on the level of

• Decide on the advertising media and the intensity of advertising campaigns. • Managerial economics is
used by businesses to decide on employment and

• After all the analyses, the management looks at the opportunities for further

Art and Science

• Managerial Economics requires a lot of creativity and logical thinking to come up with a solution. A
managerial economist should possess the art of utilizing his capabilities, knowledge, and skills to achieve
the organizational objective. Managerial Economics is also considered as a stream of science as it involves
the application of different economic principles, techniques, and methods, to solve business problems.

Scope of Managerial Economics

• Demand Analysis and Forecasting • Cost and Production Analysis

• Pricing Decisions, Policies, and Practices • Capital Management

• Profit Management

Opportunity Cost
• Every decision involves an opportunity cost that is the cost of those options which we let go of while
selecting the most appropriate one.

Normative Managerialism
• The normative view of managerial economics means that the decisions taken by the administration
would be normal, based on real -life experiences and practices. The decisions reflect a practical approach
regarding product design, forecasting, marketing, supply and demand analysis, recruitments, and
everything else that is concerned with the growth of a business.

Radical Managerialism
• Radical managerialism means to come up with revolutionary solutions. Sometimes, when the
conventional approach to a problem doesn’t work, radical managerialism may have the solution.
However, it requires the manager to possess some extraordinary skills and thinking to look beyond. In
radical managerialism, consumer needs and satisfaction are prioritized over profit maximization.