1.

Growing complexity of business decision

making process due to changing market
conditions and business environment.
2. The increasing use of economic logic,
conceptual theories and tools of economic
analysis in the process of business decision
making process.
3. Rapid increase in demand for professionally
trained managerial manpower.
• It is a social science, which studies human
behaviour in relation to optimizing allocation
of available resources to achieve the given
goals.
• The ultimate goal of economics is to improve
the living conditions of people in their
everyday life.
• “Economics is a study of man in the ordinary
business of life. It inquires how he gets his
income and how he uses it. Thus, it is on the
one side, the study of wealth and on the other
and more important side, a part of the study of
man.”- Alfred Marshall
• “Economics is a science which studies human
behaviour as a relationship between ends and
scarce means which have alternative uses.”-
Lionel Robbins
• Condition in which the availability of resources is
insufficient to satisfy the wants and needs of
individuals and society.
• Because of scarcity, whenever the decision is
made to follow one course of action, a
simultaneous decision is made to forgo some
other course of action
• Goods, services & productive resources that are
scarce have a positive price.
FACTORS OF PRODUCTION
• Land- refers to all natural resources such
as;
 Wildlife
 Mountain Scenery
 Minerals
 Oil& Gas Deposits
 Water
FACTORS OF PRODUCTION
• Labor- refers to the physical and
intellectual abilities of people
 Different individuals have different physical
and intellectual attributes. These differences
may be inherent, or they may be acquired
through education & training
FACTORS OF PRODUCTION
• Capital- refers to manufactured commodities
that are used to produce goods & services for
final consumption such as;
 Machinery
 Office Building
 Equipment
 Warehouse Space
 Facilities
 Research and Development
FACTORS OF PRODUCTION
• Entrepreneurial Activity- ability to recognize
profitable opportunities, and the willingness
and ability to assume risk associated to
organizing land, labor and capital to produce
the goods & services that are most in demand
by consumers. People who exhibit this ability
are call entrepreneurs.
• It is the highest valued alternative forgone
whenever a choice is made

• Scarcity necessitates trade-offs. That which is

forgone whenever a choice is made is the next
best alternative.
• Macroeconomics
- study of aggregate economic behavior.
- study of the entire economies & economic
systems and specifically considers broad
economic aggregates such as;
 National Income
 Employment
 Inflation
 National Output
 Economic Growth
• Microeconomics
- study of individual economic behavior.
- study of the behavior & interaction of individual
economic agents. These economic agents
represents individual firms, consumers &
governments. Microeconomists are concerned
with;
 Output and Input markets
 Product Pricing
 Input Utilization
 Production Costs
 Market Structure
 Capital Budgeting
• Application of the economic concepts
and economic analysis to the problems of
formulating rational managerial
decisions.
• Simply stated, managerial economics is
applied microeconomics with special
emphasis on those topics of greatest
interest & importance to managers.
• The synthesis of Microeconomic theory
and Quantitative Methods to find optimal
solutions to managerial decision-making
problems.

• In other words, the firm’s operations must

be quantified so that the optimization
principles of economic theory may be
applied
• Assessment of investible funds
• Selecting business area
• Choice of product
• Determining Optimum output
• Sales Promotion
• Theories are abstractions that attempt to strip
away unnecessary detail to expose only the
essential elements of observable behavior.
• Theories are often expressed in the form of
models.
• A “model” is formal expression of a theory.
• “Good” theories predict with greater
accuracy than “bad” theories.

• If one theory predicts an event with greater

accuracy, then it will replace alternative
theories, no matter how well those theories
may have predicted the same event in the
past.
• Law- statement of facts about the real world.
They are statements of relationships that are,
as far as commonly known, invariant with
respect to specified underlying assumptions or
preconditions.
 Theory- attempt to explain or predict the
behavior of objects or events in the real world.
Unlike laws, theories cannot predict events
with complete accuracy.
 Descriptive- attempts to interpret observed
phenomena and to formulate theories about possible
cause-and effect relationships.

 Prescriptive- attempts to predict the outcomes of

specific management decisions.

 Thus, the principles developed in managerial

economics may be used to prescribe the most
efficient way to achieve an organization’s objectives.
 Managerial economics can be utilized by goal-
oriented managers in two ways;
1. Given the existing economic environment, the
principles of managerial economics may provide a
framework for evaluating whether managers are
efficiently allocating resources to produce the firm’s
output at least cost.
2. The principles of managerial economics can help
managers respond to various economic signals. For
example, given an increase in the price of output or the
development of a new lower cost production
technology, the appropriate response generally would be
for a firm to increase output.
 Refers to the tools and techniques of
analysis.
 Including the following:
 Optimization Analysis
 Statistical Methods

 Game Theory

 Capital Budgeting
1. What goods & services should be produced,
and in what amounts?
2. How these goods & services should be
produced?
3. For whom these goods & services should be
produced?
 What goods & services should be produced, and in
what amounts?

• In market economies, what goods & services are

produced by society is a matter determined not by
the producer, but rather by the consumer.
• Consumers express their preferences through their
purchases of goods & services in the market.
• The authority of consumers to determine what goods
& services are produced is often referred to as
consumer sovereignty.
 How are goods & services produced?

• Refers to the technology of production, and this is

determined by the firm’s management. Production
technology refers to the types of input used in the
production process, the organization of those factors
of production, and the proportions in which those
inputs are combined to produce goods & services
that are most in demand by the consumer.
 For whom are goods & services produced

• Those who are willing, and able, to pay for the

goods & services produced are the direct
beneficiaries of the fruits of the production
process.
• MACROECONOMIC POLICY
Monetary policy is concerned with the
regulation of the money supply and credit.

Fiscalpolicy deals with government

spending and taxation.
• MICROECONOMIC POLICY
studyof how consumers use their limited
incomes to purchase goods and services to
maximize their utility (satisfaction or
happiness)
 Production efficiency- occurs when firms
produce given quantities of goods and services
at least cost. From society’s perspective,
production efficiency takes place when
society’s resources are fully employed and are
used in the best, most productive way.
 Consumption efficiency- occurs when
consumers derive the greatest level of
happiness, satisfaction, or utility from the
purchase of goods and services with their
limited income. Consumers, in other words,
receive the greatest “bang for the buck.”