Republic of the Philippines

Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

COURSE TITLE : Managerial Economics

PROFESSOR : Irene F. Sibug, PHDBA
Module 1: Introduction to Managerial Economics

Topics for Discussion

1. The concept of Economics
2. Managerial Economics and its nature
3. Types of Managerial Economics
4. Principles and scope of Managerial Economics

1. Discussion and Learning Resources /Links

A. An Introduction to Managerial Economics
The problem of choice arises because of scarcity and Economics is the study about
making choices in the presence of scarcity. The study of such choice problem at the individual,
social, national, and global level is what Economics is all about. Hence, Economics as a social
science studies the human behavior as relationship between numerous wants and scarcity
pertains to the limitations of resources to satisfy these unlimited human wants. Further, it is
broadly classified into two categories: Macroeconomics and Microeconomics. Macroeconomics
is the study of the economic system as a whole while Microeconomics focuses on the behavior
of the individual economic activity, firms and individuals, and their interaction in markets.
Managerial economics is a stream of management studies which emphasizes solving
business problems and decision-making by applying the theories and principles of
microeconomics and macroeconomics. It is a specialised course dealing with the organisation’s
internal issues by using various economic theories (Prachi, 2018).
Economics is an inevitable part of any business. Business assumptions, forecasting, and
investments may be based on this one single concept.
Nature of Managerial Economics
To know more about managerial economics, we must know about its various characteristics by
studying the nature of this concept in the following points:

(leverage.edu.com)
Art and Science: Managerial economics requires a lot of logical thinking and creative skills for
decision making or problem-solving. It is also considered to be a stream of science by some
economist claiming that it involves the application of different economic principles, techniques
and methods, to solve business problems (managementstudyguide.com)
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

Micro Economics: In managerial economics, managers generally deal with the problems related
to a particular organisation instead of the whole economy. Therefore it is considered to be a part
of microeconomics.
Uses Macro Economics: A business functions in an external environment, i.e. it serves the
market, which is a part of the economy as a whole.
Therefore, it is essential for managers to analyse the different factors of macroeconomics such
as market conditions, economic reforms, government policies, etc. and their impact on the
organisation.
Multi-disciplinary: It uses many tools and principles belonging to various disciplines such as
accounting, finance, statistics, mathematics, production, operation research, human resource,
marketing, etc.
Prescriptive / Normative Discipline: It aims at goal achievement and deals with practical
situations or problems by implementing corrective measures.
Management Oriented: It acts as a tool in the hands of managers to deal with business-related
problems and uncertainties appropriately. It also provides for goal establishment, policy
formulation and effective decision making.
Pragmatic: It is a practical and logical approach towards the day to day business problems.

Types of Managerial Economics

All managers take the concept of managerial economics differently. Some may be more
focused on customer’s satisfaction while others may prioritize efficient production.
The various approach to managerial economics can be seen in detail below:

(theinvestorsbook.com)

Liberal Managerialism
A market is a democratic place where people are liberal to make their choices and
decisions. The organisation and the managers have to function according to the customer’s
demand and market trend. Otherwise, it may lead to business failures.
Normative Managerialism
The normative view of managerial economics states that administrative decisions are
based on real-life experiences and practices. They have a practical approach to demand
analysis, forecasting, cost management, product design and promotion, recruitment, etc.
Radical Managerialism
Managers must have a revolutionary attitude towards business problems, i.e. they must
make decisions to change the present situation or condition. They focus more on the customer’s
requirement and satisfaction rather than only profit maximisation (visionarybusinessperson.com)
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

B. Principles of Managerial Economics

The great macroeconomist N. Gregory Mankiw has given ten principles to explain the
significance of managerial economics in business operations. These principles are classified as
follows:

(theinvestorsbook.com)

Principles of How People Make Decisions

To understand how the decision making takes place in real life, let us go through the
following principles:
 People Face Trade-offs. To make decisions, people have to make choices where they
have to select among the various options available.
 Opportunity Cost. Every decision involves an opportunity cost which the cost of those
options which we let go while selecting the most appropriate one.
 Rational People Think at the Margin. People usually think about the margin or the profit
they will earn before investing their money or resources at a particular project or
person.
 People Respond to Incentives. Decisions making highly depends upon the incentives
associated with a product, service or activity. Negative incentives discourage people,
whereas positive incentives motivate them.

Principles of How People Interact

Communication and market affect business operations. To justify the statement, let us
see the following related principles:
 Trade Can Make Everyone Better off. This principle says that trade is a medium of
exchange among people. Everyone gets a chance to offer those products or services
which they are good at making. And purchase those products or services too, which
others are good at manufacturing.
 Markets Are Usually A Good Way to Organize Economic Activity. Markets mostly act
as a medium of interaction among the consumers and the producers. The consumers
express their needs whereas the producers decide whether to produce goods or
services required or not.
 Governments Can Sometimes Improve Market Outcomes. Government intervenes
business operations at the time of unfavourable market conditions or for the welfare of
society. One such example is when the government decides minimum wages for labour
welfare(coursehero.com)
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

Principles of How Economy Works As A Whole

The following principle explains the role of the economy in the functioning of an
organization:
 A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
For the growth of the economy of a country, the organisations must be efficient enough
to produce goods and services. It ultimately meets the consumer’s demand and
improves GDP to raise the country’s standard of living.
 Prices Rise When the Government Prints Too Much Money. If there are surplus money
available with people, their spending capacity increases, ultimately leading to a rise in
demand. When the producers are unable to meet the consumer’s demand, inflation
takes place.
 Society Faces a Short-Run Trade-off between Inflation and Unemployment. To reduce
unemployment, the government brings in various economic policies into action. These
policies aim at boosting the economy in the short run. Such practices lead to inflation.
 Scope of Managerial Economics. Managerial economics is widely applied in
organizations to deal with different business issues. Both the micro and
macroeconomics equally impact the business and its functioning

(theinvestorsbook.com)

Micro-Economics Applied to Operational Issues

To resolve the organisation’s internal issues arising in business operations, the various
theories or principles of microeconomics applied are as follows:
 Theory of Demand: The demand theory emphasises on the consumer’s behaviour
towards a product or service. It takes into consideration the needs, wants, preferences
and requirement of the consumers to enhance the production process.
 Theory of Production and Production Decisions: This theory is majorly concerned with
the volume of production, process, capital and labour required, cost involved, etc. It
aims at maximising the output to meet the customer’s demand.
 Pricing Theory and Analysis of Market Structure: It focuses on the price determination
of a product keeping in mind the competitors, market conditions, cost of production,
maximising sales volume, etc.
 Profit Analysis and Management: The organisations work for a profit. Therefore they
always aim at profit maximisation. It depends upon the market demand, cost of input,
competition level, etc.
 Theory of Capital and Investment Decisions: Capital is the most critical factor of
business. This theory prevails the proper allocation of the organisation’s capital and
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

making investments in profitable projects or venture to improve organisational

efficiency (Guna, 2012).

Macro-Economics Applied to Business Environment

Any organisation is much affected by the environment it operates in. The business
environment can be classified as follows:
 Economic Environment: The economic conditions of a country, GDP, economic policies,
etc. indirectly impacts the business and its operations.
 Social Environment: The society in which the organisation functions also affects it like
employment conditions, trade unions, consumer cooperatives, etc.
 Political Environment: The political structure of a country, whether authoritarian or
democratic; political stability; and attitude towards the private sector, influence
organizational growth and development.
Managerial economics provides an essential tool for determining the business goals and
targets, the actual position of the organization, and what the management should do fill the gap
between the two. (Prachi, M., 2018).

Classwork Number 1
Date of Submission: October 02, 2020

Answer the following questions:

1. Is it possible for a Managerial Economist to be liberal, normative, and radical at the
same time? Explain your answer.
2. How may Managerial Economics assist businesses in today’s economic crisis?
3. As previously mentioned, Managerial Economics is a stream of management studies
which emphasizes solving business problems and decision-making. What guided you in
your decision to:
a. enrol in GCC.
b. take BS Accountancy.
c. continue your studies despite the pandemic?
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

References

Books:
Mankiw, N.G. (2016). Business Economics. Cengage Learning.
Samuelson, W. and Marks, S. (2015). Managerial Economics (7th edition). John Wiley and
Sons, Inc.

Online sources:
Brigham Young University (n.d.). Retrieved from https://www.coursehero.com/ file/p5724b/The-
next-three-principles-discuss-how-people-interct-with-each-other-Principle/
Guna, S. (2012). Managerial Economics. Retrieved from https://www.scribd.com/doc/
78945883/ Managerial-Economics
Managerial Economics: Definition, Types, Principles, Nature, Scope and Limitations (2020).
Retrieved from https://visionarybusinessperson.com/managerial-economics
Prachi, M.(2018). Managerial Economics. Retrieved from https://theinvestorsbook.com/
managerial-economics.html
Role of Managerial Economics. (2012). Retrieved from https://relivingmbadays.
wordpress.com/2012/08/02/role-of-managerial-economics/
Nature of Managerial Economics (n.d.) Retrieved from https://managementstudyguide.com
/managerial-economics-nature.htm