MANAGERIAL

ECONOMICS
NATURE AND SCOPE OF
MANAGERIAL ECONOMICS

Prepared By VINAYAKA TRIPATHI, E-mail – tripathivinayak3@gmail.com

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MANAGERIAL ECONOMICS
INTRODUCTION
• Managerial Economics has emerged as a new
branch of economics,
• The emergence of managerial economics can be
attributed to at least three factors:
• Growing Complexity of business environment and
decision making process,
• Increasing applications of economic logic, concepts,
theories and tools of economic analysis in the process
of business decision making,
• Rapid increase in demand for professionally trained
managerial manpower with good knowledge of
economics.
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 WHAT IS ECONOMICS
• Adam Smith in his book ‘The Wealth of Nations’,
also known as ‘Father of Economics’, a classical
economist, has defined economics as “an enquiry into
the nature and causes of the wealth of nations”.
• Alfred Marshall in his book ‘Principle of
Economics’ , an eminent economist of the neo-classical
era, “Economics is the study of mankind in the ordinary
business of life”.
• Lionel Robbins in his book ‘An Essay on the Nature
and Significance of Economic Science’, has defined
economics as “Economics is the science which studies
human behavior as a relationship between ends and
scarce means which have alternative uses”.
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WHY DO PEOPLE
ECONOMIZE?
Human wants, Desires
and aspirations are
unlimited.

Resources available to the

people are scarce.

People are by nature

economizers

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 ECONOMICS
MACROECONOMICS AND MICROECONONOMICS
• Economics as a social science has two major branches
– Microeconomics and Macroeconomics.
• Macroeconomics is the study of the economizing
behavior of the individual economic entities –
individual, households, firms, industries and factory
owners.
• Macroeconomics, in case of business firms, studies
how business firms take decisions on What to produce,
for Whom to produce, How to produce, How much to
produce, What price to charge, How to fight the
competition and How to promote sales to maximize
their profit.
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 ECONOMICS
Microeconomics and Macroeconomics
• Microeconomics is the study of economic
phenomena at the national aggregate
level. It is the study of working and
performance of the economy as a whole.
• From managerial economics point of
view, Macroeconomics gives basis for
judging the economic environment of the
country.
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 MANAGERIAL ECONOMICS
• Managerial Economics can be defined as the study of economics
theories, logic, concepts and tools of economic analysis applied in
the process of business decision making.
• In the words of Mansfield, “Managerial Economics is concerned
with the applications of economic concepts and economics to the
problem of formulating rational decision making.
• As per Evan J. Douglas, “Managerial Economics is concerned
with the application of the economic principles and methodologies
to the decision making process within the firm or organization. It
seeks to establish rules and principles to facilitate the attainment of
the desired goals of management.
• According to McGutgan and Moyer, Managerial Economics is
the application of economic theory and methodology to decision
making problems faced by both public and private institutions.
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 CHARACTERISTICS OF
MANAGERIAL ECONOMICS
Managerial Economics is
Managerial Economics uses
Managerial Economics is Prescriptive rather than
Theory of Firm - It uses
pragmatic – It tries to solve Descriptive – It not only
economic concepts and
managerial problems in describes the goals of an
principles which are know
their day to day organization but also
as theory of firm or
functioning. prescribes the means of
economics of the firm.
achieving these goals.

Managerial Economics is a
Managerial Economics is
normative and applied
Managerial Economics a Scientific Art – It helps
discipline – It is concerned
aims at helping to the the management in the best
with what management
management. and efficient utilization of
should do with under
scares economic resources.
particular circumstances.

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INTERGRATION OF ECONOMICS
WITH MANAGERIAL ECONOMICS

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HOW ECONOMICS CONTRIBUTES TO MANAGERIAL DECISIONS
• According to William J. Baumol, A noble laureate in economics,
Economics theory contribute to business decision making by three
important ways:

• Providing framework for building analytical models

which can help recognize the structure of managerial
First problem, determine the important factors to be
managed, and eliminate the minor factors which or
that might obstruct business decision,

• Economics provides ‘a set of analytical methods’

which may not be directly applicable to analyze
specific business problem but they do widen the scope
Second of business analysis and enhance the analytical
capability of the business analyst in understanding the
nature of business problem,

• Various economic theory offers clarity to various

Third economic concepts used in business analysis, which
enable the managers to avoid conceptual pitfalls.

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• Apart from above three important ways,
economics also provide models, tools and
technique to predict the future course of
market conditions, ways and means to assess
the risk and, thereby, helps in business
decision making.

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SCOPE OF MANAGERIAL ECONOMICS
• As noted above, economic science has two major branches,
viz., Microeconomics and Macroeconomics.
• Both Microeconomics and Macroeconomics are applied to
business analysis and decision making depending on the
nature of the issue to be examined.
• Managerial decision can be divided broadly under two
broad categories:
– Internal Managerial Issues
– External Managerial Issues
• In brief, Microeconomic theories and analytical tools are
applied to internal managerial or operational issues and
Macroeconomic theories and analytical techniques are
applied to assess the external and environmental issues.

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 MICROECONOMIC THEORIES APPLIED
TO INTERNAL ISSUES
• Internal Managerial issues refer to decision making issues arising in the
management of the firm. It include problems that arise in operating the
business organization.
• Some of the basic internal management issues can be listed as follows:
– What to produce = Choice of the business
– How much to produce = Determining the size of the firm
– How to Produce choice of efficient and affordable technology
– How to price the product = Determining the price of the product
– How to promote sale of the product
– How to face price competition from the competing firms
– How to enlarge the scale of production = planning new investment
– How to manage profit and capital

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 MICROECONOMIC THEORIES APPLIED TO
INTERNAL ISSUES

• The main microeconomic theories that fall within the

scope of managerial economics are as follow:
– Theory of Consumer Demand – It analyze the decision
making behavior of the consumers.
– Theory of Production – It analyze the nature of input-
output relationship.
– Theory of Cost –It analyze the nature and pattern of
change in cost of production with change in output.
– Theory of Price Determination – It analyze of how price
is determined under different kinds of market conditions.
– Theory of Capital and Investment decision – It helps in
analyzing and making appropriate investment decisions.

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 MACROECONOMICS APPLIED TO
BUSINESS DECISIONS
• While making business decisions , management have to
take into account the economic environment of the
country. The factors which determine the economic
environment of a country are:
– General trend in the national income (GDP), savings,
investments, prices, employment, etc.,
– The structure and role of financial institutions,
– The level and trend of foreign trade,
– Economic policies of the government,
– Socio-economic organizations like trade union and
consumer organizations,
– Political Environment.

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 MACROECONOMICS APPLIED
TO BUSINESS DECISIONS
• The major macroeconomic environmental factors that figure in
business decisions, especially those related to forward
planning and formulation of strategy, may be categorized
under three category:

TREND IN ECONOMY

INTERNATIONAL ECONOMIC
CONDITIONS

GOVERNMENT POLICIES

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 SOME OTHER DISCIPLINES OF
MANAGERIAL ECONOMICS
• Apart from scope of Managerial Economics that consist mainly of
Micro and Macro Economic theories, concepts and tools of analysis
there are certain other disciplines which contribute to quantitative
economic analysis of business problems and hence to business
decision making:
– Mathematical Tools – The use of mathematical tool in the analysis
of economic variables provides not only the clarity of concepts, but
also a logical and systematic framework for measuring the
quantitative relationships between relevant variables.
– Statistics – Statistical tools like theory of probability, and
forecasting technique helps the decision makers in predicting future
course of economic events and probable outcome of their business
decisions.
– Operations Research – It combines economics, mathematics and
statistics to build models for solving specific business problems and
to find a quantitative solution. E.g. – Linear Programming and Goal
Programming.
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 Suggested Readings
1. https://en.wikipedia.org/wiki/Adam_Smith
2. https://en.wikipedia.org/wiki/Alfred_Marshall
3. https://en.wikipedia.org/wiki/Lionel_Robbins
4. https://economicsconcepts.com/managerial_economics.htm
5. Dwivedi, D.N., Managerial Economics (Vikas Publishing house Pvt. Ltd., New
Delhi)
6. https://en.wikipedia.org/wiki/Managerial_economics#cite_note-2
7. http://www.swlearning.com/economics/hirschey/managerial_econ/chap01.pdf

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THE END

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