Introduction to Managerial Economics
The Meaning of Managerial Economics
Managerial Economics
➢ A branch of economics involving
the application of economic
methods in the managerial
decision-making process
➢ A stream of management studies
that emphasizes primarily
solving business problems and
decision-making by applying the
theories and principles of micro
and macroeconomics
➢ Can be defined as combining
economic theory with business
practices to ease decision
making and future planning by
management
➢ To optimize decision making
when the firm is faced with
problems or obstacles, with the
consideration of macro and
microeconomic theories and
principles.
➢ To analyze the possible effects
and implications of both short
and long-term planning
decisions on the revenue and
profitability of the business.
➢ It guides the managers in taking
decisions relating to the firm’s
customers, competitors,
suppliers as well as relating to
the internal functioning of a
firm
➢ Helps in enhancement of
analytical skills, assists in
rational configuration as well
as solution of problems.
➢ The key to Managerial
Economics is the micro-economic
theory of the firm. It lessens the
gap between economics in
theory and economics in
practice.
➢ It enables optimum utilization of
scarce resources in such
organizations as well as helps
in achieving the goals in most
efficient manner.
The Scope of Managerial Economics
Managerial Economics has a
narrower scope - it is solving
managerial issues using micro-
economics. It ensures that
managers make effective and
efficient decisions concerning the
scarce resources.
The fact of scarcity of resources project appraisal
gives rise to three fundamental methods (for long-term
questions- investment decisions),
etc. for making these
• What to produce?
crucial decisions.
- what goods and services
• For whom to produce?
should be produced and
- The firm, for instance,
in what
must decide which is its
amount/quantities
niche market-domestic or
- managers use demand
foreign?
theory (consumer
- It must segment the
behavior, factors
market.
influencing purchase
- It must conduct a
and consumption)
thorough analysis of
- demand forecasting
market structure and
(time series and causal
thus take price and
models)
output decisions
• How to produce?
depending upon the type
- The firm has now to
of market.
choose among different
alternative techniques of The Nature of Managerial Economics
production. Managerial Economics is a Science
- It has to make decision
regarding purchase of • based on methodical
raw materials, capital observation making decisions
equipment, manpower, regarding scarce resources
etc. with alternative applications.
- The managers can use • Policies are made after
various managerial persistent testing and
economics tools such as trailing
production and cost • Its principles are
analysis (for hiring and universally applicable
acquiring of inputs),
Managerial Economics is an Art
• Managerial economist is
required to have an art o
utilizing his capability,
knowledge and understanding
to achieve the organizational
objectives.
Managerial Economics for
administration of organization
• Helps the management in
decision making.
Managerial economics is helpful in
optimum resource allocation
• Managers need to use these
limited resources optimally
because they are the one who
decides the use of the
resources.
Managerial Economics has components
of microeconomics
• Managers study and manage
the internal environment of an
organization
• Deals with the problems faced
by the organizations such as
the main objective, demand,
output determination and etc.
Managerial Economics has components
of macro economics
• They’re affected by the
external environment of the
economy such as government
policies, price level, and etc.
Managerial Economics is dynamic in
nature
• Deals with human beings.
Managerial Economics is a blend of
Economics and Management, heavily
influenced by microeconomics and
macroeconomics. Microeconomics
studies individual consumer and firm
behavior, while macroeconomics looks at
the economy as a whole.
Managerial Economics applies
microeconomic theories to address
organizational issues and make
decisions efficiently. Managers use
their understanding of microeconomic
concepts to plan and execute
business strategies that aim to
maximize profits or minimize costs,
regardless of technological
constraints and market conditions.
Microeconomic analysis is crucial for
addressing daily business challenges
and concerns.
 RELATION TO MICROECONOMICS
AND MACROECONIMCS
The Reliance of Managerial Economics
on Microeconomics
Managerial Economics relies heavily
on Microeconomics in various ways:
1. Price Adjustment.
When a manager needs to raise
product prices due to increased
production costs, they use demand
analysis to ensure that the price
increase doesn't significantly reduce
product demand.
2. Pricing Strategies.
Managers apply microeconomic pricing
theories, cost analysis, and revenue
theories to set the prices of their
products.
3. Production Decisions.
Managers rely on microeconomic
theory of production to make decisions
about what and how much to produce,
considering factors like resource
availability, technology, and raw
materials.
4. Market Structure Understanding.
Knowledge of market structures and
the approaches used to determine
prices and outputs in a given market
is essential for managerial decisions.
5. Statistical Methods.
Utilizes statistical methods such as
game theory and linear programming to
apply economic theory in decision-
making.
6. Cost-Benefit Analysis.
Cost and benefit analysis is a
valuable tool for managers to aid in
their decision-making processes.
7. Social Responsibility.
Understanding welfare economics
helps managers consider the social
responsibilities of their organization.
8. Equilibrium Analysis.
Microeconomics provides the concept
of partial equilibrium analysis, which
helps managers determine the
equilibrium for their organization.
9. Mathematical Tools.
Use of mathematical tools and
econometrics, including regression
analysis and correlation analysis, to
support decision-making.
Macroeconomics Applied to Business
Government
1. Economic Environment,
This includes a country's economic
conditions, such as its GDP (economic
output), government policies, and more.
These factors indirectly influence the
company and its operations.
2. Social Environment.
The society in which the organization
operates plays a crucial role. This
includes aspects like employment
conditions, the presence of trade
unions, and consumer cooperatives, all
of which can affect the organization.
3. Political Environment.
The political landscape of a country,
whether it's an authoritarian or
democratic system, political stability,
and the government's stance toward
the private sector, all impact the
growth and development of the
organization.
Role of a Managerial Economist
1. Analyze macro-level economic
patterns and their relevance to the
specific firm they work for.
2. Assess how to turn a dynamic
economic environment into profitable
opportunities.
3. Assist in the firm's business
planning process.
4. Conduct cost-benefit analyses.
5. Support internal decisions,
including pricing, and more.
6. Analyze changes in macroeconomic
indicators like national income,
population, and business cycles and
their impact on the firm.
7. Advise on public relations, foreign
exchange, trade, and the effects of
monetary and fiscal policy changes.
8. Analyze competing firms and gather
economic data about the firm's
operating environment.
9. Conduct in-depth research on the
industrial market.
10. Rely on elaborate statistical
analysis to perform their duties.
11. Must remain vigilant and handle
pressure effectively.
12. Provide economic information to
management, government authorities,
and may prepare speeches for top
management.