MANAGERIAL ECONOMICS-CHAPTER 1-OVERVIEW OF MANAGERIAL

ECONOMICS

What is Managerial Economics?

● Managerial Economics is a stream of management studies that emphasizes

primarily solving business problems and decision making by applying the theories
and principles of micro and macroeconomics. It is a specialized stream dealing
with organization’s internal issues by using various economic theories.

● Managerial Economics is concerned with the application of economic

concepts and economic analysis to the problems of formulating rational
managerial decisions.

● Managerial Economics- It is the integration of economic theory with

business practice for the purpose of facilitating decision making and
management (Spencer and Siegelman).

MICRO, MACRO AND MANAGERIAL ECONOMICS RELATIONSHIP

Microeconomics- studies the economic actions of individual consumers and firms
Demand and supply between individuals:

● Consumers

● Buyers

● Vendors
 ● Providers

Macroeconomics- deals with the performance, structure, and behavior of an

economy as a whole. Studies related to local national, regional and global
economies.
Managerial Economics- applies microeconomic theories and techniques to
management decisions. Managerial Economics deals with allocating the scarce
resources in a manner that minimizes the cost. The fact of scarcity give rise
to the following questions:
1. What to produce?
2. How to produce?
3. For whom to produce?
HOW TO ANSWER THE THREE QUESTIONS
To answer these questions, a firm makes use of managerial economic principles.
Q1- The managers use demand theory for deciding this.
(a.) The demand theory examines consumer behavior with respect to the kind of
purchases they like to make currently and in the future.
(b) The factors influencing purchase and consumption of specific good and
service,
(c) the impact of change in these factors on the demand of that specific good or
service
(d) the goods or services which consumers might not purchase and consume in
thew future.
(e) In order to decide the amount of goods and services to be produced, the
managers use methods of demand forecasting. Demand forecasting is a field of
predictive analytics which tries to understand and predict customer demand to
optimize supply decisions by corporate supply chain and business management. It
is done by estimating the sales proceeds or demand for a product in the future.
Q2- The firm has now to choose from the different alternative techniques of
production. It has to make decisions regarding purchase of raw materials,
capital, equipments, manpower, etc. The managers can use various
managerial economic tools such as :
(1.)production and cost analysis (for hiring and acquiring of inputs.)
(2)project appraisal methods (for long term investment decisions).

Q3- The firm for instance must decide which is its niche (specialized segment
of a market for a particular kind of product or service) market-domestic or
foreign. It must conduct a thorough analysis of market structure and thus take
price output decisions depending upon the type of market.
NOTE: The most important function in managerial economics is decision making.
It
involves the complete course of selecting the most suitable action from two
or more alternatives. The primary function is to make the most profitable use
of resources which are limited (land, labor, capital, etc.)
The most important function in managerial economics is decision making. It
involves the complete course of selecting the most suitable action from two
or more alternatives. The primary function is to make the most profitable use
of resources which are limited (land, labor, capital, etc.)
The most important function in managerial economics is decision making. It
involves the complete course of selecting the most suitable action from two
or more alternatives. The primary function is to make the most profitable use
of resources which are limited (land, labor, capital, etc.)
MANAGERIAL ECONOMICS
 a. Demand Analysis
b. Profit Management
c. Capital Management

PRINCIPLES OF MANAGERIAL ECONOMICS

1. PRINCIPLES OF HOW PEOPLE DECIDE
a. Humans face tradeoffs-to make decisions, people have to make choices on
whether to choose from different options available.
b. Price of Opportunity- Each decision involves a cost of opportunity which is the
cost of those options that we let go of while choosing the most appropriate one.
d. Feel fair about the margin- people typically think about the margin or
income they receive before investing in a specific project or individual with
their money or resources.
e. People respond to stimulus- decisions to be made highly depend on
incentives related to a product, service or activity. Negative incentives
discourage people, while positive incentives encourage people.

2. PRINCIPLES OF HOW PEOPLE INTERACT

Communication and market impact business transactions. Let us take a look on
the following related principle to justify the statement.
a. Trade could better anyone- This state that trade is a way for people to
share, everyone gets an opportunity to offer those good products or
services they make and buy those products or services that other people
are good at manufacturing.
3. PRINCIPLES ON HOW ECONOMY WORKS- The following theories outline
the economic role of an organization’s functioning:
a. The standard of living of a country depends on its capacity to generate
goods and services.
b. Companies must be productive enough to produce products and services
for the development of a country’s economy.
c. Prices increases when the government will print lots of money. If citizens will
have surplus money their capacity to spend increases,
eventually leading to a rise in demand. Inflation takes place when the
manufacturers are unable to satisfy market demand.
ANOTHER 5 PRINCIPLES OF MANAGERIAL ECONOMICS
1. MARGINAL AND INCREMENTAL PRINCIPLE- This principle states that a
decision is said to be rational and sound if given the firm’s objective of
profit maximization, it leads to increase in profit, which is either of two
scenarios:
● If the total revenue increases more than total cost

● If total revenue declines less than the total cost

Marginal analysis implies judging the impact of unit change in one variable on the
other. Marginal generally implies to small changes.
Marginal Revenue is change in total revenue per un it changes in output sold.
Marginal Cost refers to change in total cost per unit of change in output
produced.
Incremental Cost (increasing or adding on) refers to change in total cost due to
change in total output.
2. EQUI-MARGINAL PRINCIPLE- Marginal Utility is the utility derived from
additional unit of commodity consumed. The laws of equi-marginal utility
states that a consumer will reach the stage of equilibrium when the marginal
utilities of various commodities he consumes are equal. (Law of Equi-Marginal
Utility explains the relation between the consumption of two or more products
and what combination of consumption these products will give optimum
satisfaction. Marginal Utility is the additional satisfaction gained by consuming
one more unit of a commodity.)
3. OPPORTUNITY COST PRINCIPLE- By opportunity cost of a decision is meant
the sacrifice of alternatives required by that decision. If there are no
sacrifices, there is no cost. According to Opportunity cost principle a firm can
hire a factor of production if and only that factor earns a reward in that
occupation or job equal or greater than its opportunity cost. Opportunity cost
is also defined as:
A. The cost of sacrificed alternatives.
B. The minimum price to retain a factor-service in its given use.
4. TIME PERSPECTIVE PRINCIPLE- This principle states that a manager/decision
maker should give due emphasis, both to short-term and long-term impact of
decisions, giving apt significance to the different time periods before reaching any
decision. Short-term refers to a time period in which some factors are fixed while
others are variable. The long-term is a period in which the consumers have
enough time to respond to price changes by varying their tastes and preferences.
5. DISCOUNTING PRINCIPLE- This states that if a decision affects costs and
revenue in the long run, all those costs and revenues must be discounted to
present values before valid comparison of alternatives are possible. . This is
essential because a peso worth of money in the future date is not worth a peso
today. Money actually has a time value. Discounting is defined as a process used
to transform future pesos into equivalent number of present pesos.