MANAGERIAL

ECONOMICS
6.53
(ECON605)
Aarushi
Amity Business School
aarushi@vf.amity.edu
COURSE MODULES
• Module I: Theory of Demand and
Supply
• Module II: Theory of Production and
Cost
• Module III: Market structure: Price and
Output Decisions
• Module IV: Macro Economic Analysis
and Business Environment
• All four modules carry equal weightage
i.e. 25%

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PEDAGOGY

• Lectures
• Case Studies
• Research Articles
• Classroom Discussions

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ASSESSMENT
End Term
Continuous Assessment/Internal Assessment
Examination
(50 %)
(50%)
Components Mid Term Project Presentation Assignment Attendance
Linkage of PSDA
with Internal PSDA 1 PSDA 2
Assessment
Component, if any

Weightage (%) 10% 15% 10% 10% 50%

5%

*PSDA - Professional Skill Development Activities

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SUGGESTED READINGS
• Gupta, G. S. (2006). Managerial Economics. Second Edition. Tata McGraw Hill.
• Dwivedi D. N. (1980). Managerial Economics, Vikas Publishing House.
• Peterson, H.C & Lewis, W.C. (2005). Managerial Economics. Fourth edition. Prentice Hall of India.
• Varshney, R. L. & Maheshwari (1994). Managerial Economics. S Chand and Co.

Additional References:
• Perloff, J. M., & Brander, J. A. (2020). Managerial economics and strategy. Third edition. Pearson.
• Baye, M. R., & Prince, J.(2021). Managerial economics and business strategy. Tenth edition. McGraw-Hill.
• Samuelson, W. F. & Marks, S. G. (2012). Managerial economics. Seventh edition. John Wiley & Sons.
• Keat, P. G., Young, P. K. & Erfle S. E. (2014). Managerial Economics. Economic Tools for Today’s
Decision Makers. Seventh edition. Pearson.
• Mankiw, N. G. (2016). Principles of Microeconomics. Eighth edition. Cengage Learning.
• RBI Reports

• Economic Survey

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INTRODUCTION
ECONOMICS
Origin of term ‘economics’ lies in Greek words
oikon & nomos, which mean ‘laws of
households’.
Every economic agent be it firm or household,
must make a choice. It has to choose between
alternative uses of the available resources.
Households must allocate its scarce resources
among members, taking into account each
family member’s abilities, efforts, & desires.
Firms must allocate its scarce resources to
achieve a level of output that maximises its
profits.
RESOURCE
Resources are anything used to
produce a good or service or,
more generally, to achieve a goal.
CHOICE
The problem of choice arises due to
scarcity of resources: limited
resources to satisfy unlimited wants.
SCARCITY
Scarcity means that society has
limited resources and therefore cannot
produce all the goods and services
people wish to have.
A resource is said to be scarce when
the demand for a resource is greater
than the supply of that resource, as
resources are limited.
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 WHAT DO ECONOMISTS STUDY?
Economists study how society
manages its scarce resources.
They study how people
make decisions: how much
they work, what they buy,
how much they save, and
how they invest their
savings.
They analyse forces and trends that affect the economy as a
whole, including the growth in average income, the fraction of the
population that cannot find work, and the rate at which prices are
rising.
They also study how people interact with one another. Eg. -
they examine how the multitude of buyers and sellers of a
good together determine the price at which the good is sold
and the quantity that is sold.
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DEFINITION OF ECONOMICS
Lionel Robbins (1932) defined economics as a socia1
science concerned with the optimum allocation of
scarce resources among competing ends.

“Economics is the science which studies human

behavior as a relationship between ends and scarce
means which have alternative uses.”

Economics is therefore, the science of optimization

under scarcity in the process of production, exchange
and consumption of goods and services.

As such, it deals with the estimation and comparison of

benefits and costs associated with all economic
decisions.

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CLASSIFICATION OF ECONOMICS

Microeconomics Macroeconomics Managerial economics

Deals with the Is concerned with the Is considered to be

behaviour of behaviour of the applied
individual economic economy at large & microeconomics. It is
units and the markets national aggregates, the study of how to
where they interact. direct scarce resources
eg. national income, in the way that most
eg. production and total employment and efficiently achieves a
consumption unemployment, managerial goal,
decisions, individual interest rate, national
markets for the saving and investment, eg. profit
products produced and exports, imports, etc. maximization of firm.
bought. .

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 ECONOMIC THEORIES THAT INFORM
MANAGERIAL DECISION-MAKING
Microeconomic
The relevant microeconomic principles for
the firms’ decision making include –
• demand theory
• production and cost theory
• pricing theory
• theory of investment decisions.
Managerial Econ I Aarushi
Macroeconomic
The macroeconomic environment that affects
firms’ decisions includes –
• behaviour of national aggregates (such as,
income, price, unemployment, poverty)
• macroeconomic policy-making aspects
(such as industrial policy, import quota,
export promotion and tariffs, administered
prices and controls, fiscal and monetary
policies)
10
ECONOMIC CONCEPTS USED ACROSS
DISCIPLINES

Reference:
Keat, Young &
Erfle (2014)

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SOME EXAMPLES OF ECONOMIC
DECISIONS
• (a) Production decisions: What to produce (involves allocation of limited funds (expected equity and
debt) among alternative investment projects), how much of a good to produce (requires forecasting of
demand) and how to produce a given quantity of the chosen good (involves choice of input mix so as to
maximize profit subject to given technology and prices of inputs)?

• (b) Exchange decisions: Who is the target group of buyers for each product and at what prices
(involves price settings so as to maximize profit subject to given market conditions)?

• (c) Consumption decisions: What and how much to (buy and) consume (requires the allocation of a
given income (consumption expenditure budget) among those goods so as to maximize human satisfaction
(utility)?

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SOME EXAMPLES OF ECONOMIC
DECISIONS

Reference: Keat, Young & Erfle (2014)

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ECONOMIC THEORIES AID IN MANAGERIAL
DECISION-MAKING
What are the How can a firm organize
economic conditions and invest in its resources
in a particular Should a firm be in in a way that it can
market in which the this business? maintain a competitive
firms are or could be
competing? advantage over other firms
in this market?
In particular: Market If so, what price and
structure? Supply and Cost leader? Product
output levels should a differentiation? Focus on
demand conditions?
Technology? Government firm set in order to market niche? Outsourcing,
regulations? International maximize its economic alliances, mergers,
dimensions? Future profit or minimize its acquisitions? International
conditions? Macroeconomic losses in the short run? dimension — regional or
factors? country focus or expansion?

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MINI CASE: DETERMINING PRICES AND
OUTPUTS TO MAXIMIZE PROFIT.
Almost all firms face the problem of pricing their products. Consider a
U.S. multinational carmaker that produces and sells its output in two
geographic regions. It can produce cars in its home plant or in its foreign
subsidiary. It sells cars in the domestic market and in the foreign market.
For the next year, it must determine the prices to set at home and abroad,
estimate sales for each market, and establish production quantities in
each facility to supply those sales. It recognizes that the markets for
vehicles at home and abroad differ with respect to demand (that is, how
many cars can be sold at different prices). Also, the production facilities
have different costs and capacities. Finally, at a cost, it can ship vehicles
from the home facility to help supply the foreign market, or vice versa.
Based on the available information, how can the company determine a
profit-maximizing pricing and production plan for the coming year?

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MINI CASE: DECISION MAKING UNDER
UNCERTAINTY
BP (known as British Petroleum prior to 2001) is in the business of taking risks. As the third
largest energy company in the world, its main operations involve oil exploration, refining,
and sale. The risks it faces begin with the uncertainty about where to find oil deposits
(including drilling offshore more than a mile under the ocean floor), mastering the complex,
risky methods of extracting petroleum, cost-effectively refining that oil, and selling those
refined products at wildly fluctuating world prices. In short, the company runs the whole
gamut of risk: geological, technological, safety, regulatory, legal, and market related. Priding
itself on 17 straight years of 100 percent oil reserve replacement, BP is an aggressive and
successful oil discoverer. But the dark side of its strategic aspirations is its troubling safety
and environmental record, culminating in the explosion of its Deepwater Horizon drilling rig
in the Gulf of Mexico in April 2010. This raises the question: What types of decisions should
oil companies like BP take to identify, quantify, manage, and hedge against the inevitable
risks they face? The failure of BP to identify and manage exploration risks led to the
explosion and the resulting massive oil spill in the gulf that took so long to stop.

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SUMMARY
Introduction to Managerial Economics

Nature and Scope of Economic Analysis

Relevance of economic analysis for managerial

decision-making

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