Introduction to Managerial Economics

Hemin Ashrafi, Faculty

Department of Business Administration

Sonargaon University

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Fundamental Questions:

⮚ What is “Economics”?

⮚ What is ‘ Micro and Macro economics?

⮚ What is Managerial Economics?

⮚ Nature, scope and significance of Managerial Economics

⮚ How it is useful to a Manager?

⮚ Functions of a Managerial Economist?

⮚ What Role a managerial Economist plays in the Management

Team 2
 Economics

Macroeconomics Microeconomics

Money, finance, banking “Sector” economics

Labor economics
Economics of IT and EC

Managerial economics

International Economics
Regional Economics
Economic Development
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What is Microeconomics and Macroeconomics ?
• Ragnor Frisch : Micro means “ Small” and Macro means
“Large”

Microeconomics deals with the study of individual behaviour.

• It deals with the equilibrium of an individual consumer,
producer, firm or industry.

Macroeconomics on the other hand, deals with economy wide

aggregates.

• Determination of National Income Output, Employment

• Changes in Aggregate economic activity, known as Business
Cycles
• Changes in general price level , known as inflation, deflation
• Policy measures to correct disequilibrium in the economy,
Monetary policy and Fiscal policy

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Introduction/Emergence of Managerial Economics

Emergence of managerial economics as a separate course of

management studies can be attributed to at least three
factors:

a) Growing complexity of business decision making

process due to changing market conditions and business
environment.

b) The increasing use of economic logic, conceptual

theories and tools of economic analysis in the process of
business decision making process.

c) Rapid increase in demand for professionally trained

managerial manpower.
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What is Managerial Economics?
“Managerial Economics is economics applied in decision making. It is a
special branch of economics bridging the gap between abstract theory
and managerial practice” – Willian Warren Haynes, V.L. Mote, Samuel Paul

“Integration of economic theory with business practice for the purpose of

facilitating decision-making and forward planning” - Milton H. Spencer

“Managerial economics is the study of the allocation of scarce resources

available to a firm or other unit of management among the activities of that
unit” - Willian Warren Haynes, V.L. Mote, Samuel Paul

“ Price theory in the service of business executives is known as Managerial

economics” - Donald Stevenson Watson

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 What is Managerial Economics (contd.)

“Managerial economics can be viewed as an application of that part of

microeconomics that focuses on such topics as risk, demand, production, cost,
pricing, and market structure.” -Petersen and Lewis

“Managerial economics is concerned with the ways in which managers should

make decisions in order to maximize the effectiveness or performance of the
organizations they manage.” - Edwin Mansfield

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What is Managerial Economics (contd.)

⚫ Douglas - “Managerial economics is .. the application of

economic principles and methodologies to the decision-making
process within the firm or organization.”
⚫ Pappas & Hirschey - “Managerial economics applies economic
theory and methods to business and administrative decision-
making.”
⚫ Salvatore - “Managerial economics refers to the application of
economic theory and the tools of analysis of decision science
to examine how an organisation can achieve its objectives most
effectively.”

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 �Howard Davies and Pun-Lee Lam -
� “It is the application of economic analysis to business
problems; it has its origin in theoretical microeconomics.”

From these ideas it can be concluded managerial economics is the

discipline, which deals with the application of economic theory to
business management.

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Concept of Managerial Economics (contd.)
Following diagram shows how does the managerial economics
provide the link between traditional economics and decision sciences
Management
Problems

Economic Theory Decision Sciences

Managerial
Economics

Economic Study of Functional

Methodology: Areas:
Descriptive Model Accounting, Finance,
Prescriptive Model and Marketing
Optimal
Decision
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 Managerial Decision Problems

Economic theory Decision Sciences

Microeconomics Mathematical Economics
Macroeconomics Econometrics

MANAGERIAL ECONOMICS
Application of economic theory
and decision science tools to solve
managerial decision problems

OPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS

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Why economics is useful
to managers
�It helps to understand:
⮚gains from specialisation and trade
⮚economic trade-offs and valuation
⮚opportunity cost (opportunities foregone) of production
and consumption
⮚the nature of substitution and complementarity in
economic activities
⮚the application of ”thinking at the margin”
⮚the nature of economic incentives and disincentives
⮚the mechanics of net benefit and profit maximisation
⮚market power and how people interact in markets
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Differences Between Economic
Theory & Managerial Theory
� Economic Theory
� It deals with the body principles
� It has the characteristics of both
micro and macro economics
� It deals with a study of individual
firm and individual consumer
� It based on certain assumptions
It studies economic aspects of
the problem
� Managerial Theory
� It deals with the application of
certain principles to solve the
problem of a firm.
� It has only micro characteristics
� It deals with the study of only
profit theories
� In managerial theory assumptions
disappear due to practical
situations
It studies both economic and non-
economic concepts 13
Focusing Factors of Managerial Economics
⚫ It is an application of that part of
microeconomics that focuses on:

⚫ Risk
⚫ Demand
⚫ Production
⚫ Cost
⚫ Pricing, and
⚫ Market Structure.
⚫ It helps rational decision making through
Model Building

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Nature, Scope and Significance of Managerial Economics:
⮚ Managerial Economics – Business Economics
⮚ Managerial Economics is ‘Normative’
⮚ Universal applicability
⮚ The roots of Managerial Economics spring from Micro Economics
⮚ Relation of Managerial Economics to Economic Theory is much like
that of Engineering to Physics or Medicine to Biology. It is the
relation of applied field to basic fundamental discipline

Core content of Managerial Economics :

⮚ Demand Analysis and forecasting of demand
⮚ Production decisions (Input-Output Decisions)
⮚ Cost Analysis (Output - Cost relations)
⮚ Price – Output Decisions
⮚ Profit Analysis
⮚ Investment Decisions

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 Scope of Managerial Economics
Operational issues of firms are of internal nature. Internal issues include all
those problems which arise within the business organization and fall within
the control of the management. Some of the basic internal issues are:

a) Choice of business and the nature of products, that is, what to produce,
b) Choice of size of the firm, that is, how much to produce,
c) Choice of technology, that is, choosing the factor-combination
(technique of production)
d) Choice of price, that is, how to price the commodity,
e) How to promote sales,
f) How to face competition,
g) How to decide on new investments,
h) How to manage profit and capital,
i) How to manage an inventory, that is, stock of both finished goods and
raw materials.

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The scope of managerial economics comprise all the
economic concept, theories and tools of analysis which can
be used for the analyze the issues related to demand,
production and cost , market structure etc.

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Functions of a Managerial Economists:

⮚The main function of a manager is decision making and managerial

Economics helps in taking rational decisions.
⮚The need for decision making arises only when there are more
alternatives courses of action.

⮚Steps in decision making :

⮚Defining the problem
⮚Identifying alternative courses of action
⮚Collection of data and analyzing the data
⮚Evaluation of alternatives
⮚Selecting the best alternative
⮚Implementing the decision
⮚Follow up of the action
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� Specific functions to be performed by a managerial Economist :

1. Production scheduling
2. Sales forecasting
3. Market research
4. Economic analysis of competing companies
5. Pricing problems of industry
6. Investment appraisal
7. Security analysis
8. Advice on foreign exchange management
9. Advice on trade
10.Environmental forecasting
- Survey of British Industry by Alexander and Kemp

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Principles of decision making
�Resources are finite, thus scarce, and should be used
economically
�Decision-makers face trade-offs and must make choices
�Every choice implies opportunity cost
�To economise, decision-makers must think at the margin
�Decision-makers usually respond to incentives
�Decision-makers should consider the value of time (or
time value of money)

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 Decision Making Areas
Business decision making is influenced not only by
economic considerations, but also by human behavioral,
technological and environmental factors due to growing
public awareness.

Decision making and processing information are two

important tasks of managers.

In order to make good decisions managers must be able to

obtain, process and use information

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Decision making processes
and their elements
�Example for six sigma quality

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Role of a managerial economist in
the firm:
�Demand estimation and forecasting

�Preparation of business and sales forecast

�Analysis of market survey to determine the

nature and extent of competition

�Analyzing the issues and problems of concerned

industry.
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Cont.
�Assisting the business planning process of the firm.

�Discovering new possible fields of business and its

cost-benefit analysis.

�Advising on prices , investment and capital

budgeting policies

�Evaluation of capital budgeting

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Responsibilities of Managerial Economist:

♦To make reasonable profits on capital employed.

♦Successful forecasts

♦Knowledge of sources of Economic Information

♦His status in the firm

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