UNIT I

Introduction
Economics is broadly categorized by:

i) Microeconomics ii) Macroeconomics

Microeconomics focus on the behavior of individual actors on the

economic stage, that is firms and individuals and their interaction in market.
Macroeconomics is the study of the economic system as a whole. It

includes techniques for analyzing changes in total output, total employment, consumer price index, unemployment rate , exports and

imports.
Thus, economics is defined as a social science, which studies human behavior in relation to optimize allocation of available achieve the given goals. resources to

Managerial economics
Managerial economics can be broadly defined as the study of economic theories, logic and tools of economic analysis that are used in the process of decision making. Economic theories and analysis are applied to analyze business problems, evaluate business options and opportunities with a view to arrive at appropriate business decision. Hague says Managerial Economics is a fundamental academic subject which seeks to understand and to analysis the problem of decision

making.
Mc Nair and Meriam says Managerial economics is the use of economic modes of thought to analyze business situation.

Circular flow of economic activity

Five sector circular flow of economy

Characteristics of managerial economics

It is concerned with decision making of an economic nature.

It is micro-economic in character. It largely uses that body of economic concepts and principles, which is known as theory of the firm. It is goal oriented and prescriptive Managerial economics is both conceptual and metrical. It includes theory with measurement.

Decision Making
DecisionProblem

Traditional Economics

Managerial Economics

Decision Science (Tools & Techniques of Analysis

Optimal Solution to Business Problems

Marginal Analysis
Marginal cost and Marginal Profit/Benefit

Marginal cost is the cost which incurred to produce the next or one more unit. Marginal revenue is the benefit which gets by producing next or one more unit. Cost will be less and benefit will be more. Marginalism Principle Marginal Cost (MC)= (TC)n (TC)n-1 where TC = Total Cost and n = unit of Product, TCn = Total cost of producing n units, TCn-1 = Total Cost of producing n-1 units Marginal Revenue (MR)= (TR)n (TR)n-1 where TR = Total revenue Decision Rule: MR>MC.MR=MC..MR<MC

Optimization
Optimization is the technique of finding the value of independent variables that

maximizes or minimizes the value of the dependent variables. For example: most of the firms are interested in finding the level of output that maximizes their total revenue, some firms facing constant price may want to find the

level of output that would minimize the average cost and most important , most
firms may be interested in finding the level of output that maximizes their profit.
Technique of Maximizing Total Revenue

Total Revenue (TR) of firm is defined as: TR=P.Q where P= Price and Q = Quantity sold.

Contd.
Suppose price function is given as P=200-4Q TR =(200-4Q)Q TR = 200Q-4Q2 Now, we have to find the value of Q that maximizes total revenue.
The Rule of TR Maximization

The total revenue is maximum at the level of sales (Q) at which MR=0, that is, marginal revenue(MR) must be equal to zero. MR is given by the first derivative of the TR function with respect to Q and set equal to zero which gives the value of Q. TR/Q

Contd..
Technique of Optimizing Output: Minimizing Average Cost

The optimum size of the firm is one that minimizes the average cost of production. The level of output that minimizes the average cost of production can be obtained by dividing Total Cost (TC) by the quantity (Q) produced. AC=TC/Q Suppose TC function is given as: TC=100-30Q+2Q2 AC=100/Q -30+2Q The Rule of Minimization is same as Rule of Maximization that is first derivative of AC function with respect to Q must be set equal to zero, as given below: AC/Q=0 The value of Q can be calculated which indicates the optimum size of output that minimizes the average cost.

Contd..
Maximization of Profit

Profit maximization is the most common objective of the business firm. Profit maximization is thus dependent on Total Revenue (TR) and Total Cost (TC) Total profit (P) is defined as: P=TR-TC Total Profit is maximum when TR-TC is maximum. Therefore, profit maximization firms tries to maximize TR-TC.