Unit-First

Managerial Economics

By. Nischay K.Upamannyu

Concept of Managerial Economics
Managerial economics is known as business economics, micro economics,
economic enterprises, applied economics and managerial Analysis.

Definition:-
Prof. Joel Dean “The Purpose of managerial economics to show how
economics analysis can be used formulating business policies”.

Haynes Mote and Paul “Managerial economics is the economics applied in

decision making. It is special branch of economic bridging the gap between
economy theory and managerial practices”.

Pappas & Hirschey - “Managerial economics applies economic theory and

methods to business and administrative decision-making.”
Meaning of managerial economics

Managerial Economics refer to the integration of economy theory with

business practices. It deals with application of economy principles to
the problem of business firm. It modify or reformulates already existing
economic model to suit the specific condition and serve the specific
problem of the business firm. It help to solve real complex problem of
business firm.
 Nature of managerial Economics

 Fundamental academic subject:- It is an academic subject that

deserve a serious and scientific treatment. As science involve
generalization, law and prediction.

 Economic Rationale of Business administration:- it is

concerned with the administration of business. It applies the
economic theory and methodology in practices so the decision is
tested on the basis of economic reasoning.

 Allocation of Resources:- optimum utilization of resources is the

one of major challenged which is faced by the managerial
economics. As the resources are limited so managerial economics
assist to business firm to use maximum utilization of resources and
gain ultimate satisfaction.
 Theory of firm:- managerial economics is concerned with theory of
firm in economy. Classical economist propounded the theory of firm
which can be explained under:
 To maximize long-term profit

 To work Rationally

 A firm is a transformation unit

 Production and price decision

 Market condition:- Managerial economic keenly analysis the

market condition. Market is the place of trying one’s strength and it
faces a challenge as well as opportunity of providing firm efficiency.

 Macro Setting:- A firm has to operate within the macro setting of

given economy. It prospect are governed by the trends in aggregate
income, in consumption pattern and in the investment and saving
level of the economy.
 Profit and pricing:- Profitability is simultaneously the goal as well
as the test of efficiency of a firm. The growth depends upon partly
the pricing setting practices.

 Decision making:- Managerial economics provide the basis for

decision making and these decision are taken scientifically.

 Help the quantitative techniques:- Like many other natural and

social science, managerial economics also has to take the help of
quantitative techniques provided by mathematically and spastics.

 Micro economics nature:- managerial economics is micro

economics in character. The subject area of managerial economics is
business firm and business unit is smallest decision making unit.
 Scope of managerial economics
 Demand analysis and forecasting :
Demand forecasting is the process of finding the values for demand in
future time period. The current values are needed to make optimal
current pricing and promotional policies, while future values are
necessary for planning future production inventories, new product
development etc. Correct estimates of demand is essential for
decision making , strengthening market position and enlarging profits.

 Cost and Production Analysis:

Production deals with the physical aspects of the business investment.
It is the process whereby inputs are transformed into outputs. A
production function is the relation which gives us the technically
efficient way of producing the output given the inputs.
Actually cost is the monetary side of production . Given the
production function, one can go for cost estimation and forecasting.
The firm must undertake cost estimation and forecasting to judge the
optimality of present output levels and assess the optimal level of
production in future.
 Inventory Management:
It refers to stock of raw materials which a firm keeps. If it is high,
capital is unproductively tide up which might, if stock of inventory
is reduced, be used for other productive purpose . On the other
hand, if the level of inventory is low, production will be hampered.
Hence, managerial economics with methods such as ABC analysis a
simple simulation exercise and some mathematical models with a
view to minimize inventory cost. It also helps in aspects of
inventory control and cost of carrying them.

 Advertising:
Managerial economics helps in determining the total advertising
cost and budget, the measuring of economic effects of advertising
and form an integral part of decision making and forward planning.
 Market Structure and Pricing Policies:
Managerial economics helps to clear surplus and excess demand to
bring market equilibrium as there is continues changes in market.
Success of business firm depends on correctness of price decisions.
Price theory works according to the nature of the market depending
on the number of sellers, demand conditions etc.

Resource Allocation : Managerial economics with the help of
advanced tools such as linear programming are used to arrive at the
best course of action for the maximum use of the available resources
and its substitutes.

Capital Budgeting: Capital is scarce and it costs
something . Hence, managerial economics helps in
decision making and forward planning on allocation of
capital to various factors of productions , marketing and
management.
 Investment Analysis: It involves planning and control capital
expenditure. Whether or not to invest funds in purchase of assets
or other resources in an attempt to make profit and how to choose
among completing uses of funds. Managerial economics help in
analysis and decision making on the investment of funds.


Risk and Uncertainty Analysis: As business firm have to operate
under conditions of risk and uncertainty both decision making and
forward planning becomes difficult. Hence managerial economics
helps the business firm in decision making and formulating plans on
the basis of past data, current information and future prediction.
Significance of Managerial economics

 Building of analytical models:-models that help to recognize the

structure of managerial problems, eliminate the minor details that
can obstruct decision making, and help to concentrate on the main
problem area.

 Making available a set of analytical methods:- for business

analyses thereby, enhancing the analytical capabilities of the
business analyst.

 Clarification of the various concepts used in business

analysis, enabling the managers avoid conceptual pitfalls.
 Estimating Economic Relationship:- Managerial economics
estimates economics relationship between different business factors
such as income, elasticity of demand and cost volume profit analysis
etc.
 Predicting Relevant Economic Quantities:-Managerial
economics helps the management in predicting various economic
quantities such as- cost, profit, demand, capital, production, prices
etc.
 Basis of Business Policies:- Managerial economics is the
foundation of business policies. Business policies are prepared on
the basis of studies and finding of managerial economics which
warns the management against all the turning points in national as
well as international economy.
Role of managerial economist
A managerial economist helps the management by using his
analytical skills and highly developed techniques in solving
complex issues of successful decision-making and future advanced
planning.

The role of managerial economist can be summarized as follows:

 He studies the economic patterns at macro-level and analysis it’s

significance to the specific firm he is working in.

 He has to consistently examine the probabilities of transforming an

ever-changing economic environment into profitable business avenues.

 He assists the business planning process of a firm.

 He also carries cost-benefit analysis.

 He assists the management in the decisions pertaining to internal
functioning of a firm such as changes in price, investment plans,
type of goods /services to be produced, inputs to be used, techniques
of production to be employed, expansion/ contraction of firm,
allocation of capital, location of new plants, quantity of output to be
produced, replacement of plant equipment, sales forecasting,
inventory forecasting, etc.

 In addition, a managerial economist has to analyze changes in

macro- economic indicators such as national income, population,
business cycles, and their possible effect on the firm’s functioning.

 He is also involved in advising the management on public relations,

foreign exchange, and trade. He guides the firm on the likely impact
of changes in monetary and fiscal policy on the firm’s functioning.
 In order to perform all these roles, a managerial economist has to
conduct an elaborate statistical analysis.

 He must be vigilant and must have ability to cope up with the

pressures.

 He also provides management with economic information such as tax

rates, competitor’s price and product, etc. They give their valuable
advice to government authorities as well.

 At times, a managerial economist has to prepare speeches for top

management.
 He also makes an economic analysis of the firms in competition. He
has to collect economic data and examine all crucial information
about the environment in which the firm operates.

 The most significant function of a managerial economist is to

conduct a detailed research on industrial market.
Responsibility of managerial Economist

 To Measure the increase in the earning capacity of a firm:-

a managerial economist has a great responsibility to achieve an
object of earning maximum profit. If he does not do this property,
the capacity of the firm can not be utilized fully and the firm can not
achieve its objects. Therefore manager should continue his efforts in
increasing the earning capacity of the firm

 To make successful forecasting:- by analyzing all the internal

and external factors and by assessing their impact on profitability
and working of the firm. Managerial economist must forecast or
predict for the prosperous future of the firm.
 To Contact the source of economic information and Experts:-
a managerial economist is responsible for providing all the
relevant economic information to the management so that the
plans and programme of the firm may be checked out before
taking these into consideration.
 To Keep the Management informed of all the possible
economic trends:- a managerial economist should keep himself in
touch with the latest development of national economy and business
environment so that he can keep the management informed with
these development and expected trends of the economy
 To achieve Respectable status in the firm:- Managerial
economist should earn his status in performing his duties and
responsibilities sincerely and seriously. He should be helpful to the
management in successful decision making
 To Perform function sincerely :- the managerial economist
should perform his function most sincerely.