Managerial

Economics
• Branch of Economics.
• ‘Managerial Economics is the study of
Economic Theories, Principles and Concepts
which is used in Managerial Decision Making.’
• ‘Managerial Economics is the Application of
various Theories, Concepts and Principles
of Economics in the Business Decisions.’
• It also Includes ‘The Application of
Mathematical and Statistical tools in
Management decisions.’
Managerial
Economics
Application of
Mathematical And
Statistical tools

Economic
Applicati
o n Manageri
Theories, al
Applicati
Principles o n Decision
and Making.
Concept
s.
 Managerial
Economics Managerial Decisions
Choice of product
Choice of production
method Choice of price,
Etc…

Application of Application of
Economic concepts, Analytical tools
Theories and such as,
Principles in Mathematical
decision Making and Statistical
tools
Managerial Economics
‘Application of
Economic Concepts,
Theories and Analytical
tools to find solutions
for managerial
problems.
 Managerial
Economics
• Economics.
– Theories
– Principles
– Concepts
• Decision Making.
– Selection of best alternative out of
various possible alternatives.
Risk & Uncertainty
 Economic
s ‘A Queen of Social
Economics:
Sciences’
Economics ‘OIKOS’ ‘NOMOS’ (Greek
‘OIKOS’
Words) ‘HOUSE’
‘NOMO ‘MANAGEME
S’ NT’
According to J.S. Mill Economics is “The practical science
of production and distribution of wealth.”
‘It is the study of How people produce and
spend
income.’
 Economics
It talks about ‘Economic Activity’
and ‘Economic Problem’.
‘It is the Study of Logic choice between Scarce resources
and unlimited wants’
‘Economics is to get the answer to the basic questions
of an economy such as, What to produce?, How to
produce? And for whom to produce?’
‘Economics is the social science that is concerned with
the production, distribution, and consumption of
goods and services.’
 Economic
Theres are Two Branches
Micro Economics: Means ‘Small’ or
‘Individual’.
The term ‘MICRO’ comes from the
Greek word
‘MIKROS’ Which means ‘Small’ or
‘Individual’.

Macro Economics: Means ‘Group’ or ‘Whole’.

The term ‘MACRO’ comes from the
Greek word ‘MAKROS’ Which means
 Micro
• Economics
Micro Economics: ‘It is the study of
particular firms, particular households,
individual prices, wages, incomes, individual
industries, particular industries.”
• Some of the theories which come under
Micro Economics,

–Theory of Individual/Market
Demand.
–Theory of Production and Cost.

–Theory of Markets and price.

 Macro
•
Economics
Macro Economics: ‘It deals not with individual
quantities as such but with aggregates of
these quantities, not with individual incomes
but with national income.’
• Some of the theories which come under Macro
Economics,
– Theory of total output and employment.
– General price level.
– Theory of Inflation.
– Theory of trade cycles
– Economic growth, Etc…
 Difference between Managerial Economics
and Economics

Economics
1.Comprehensive and Managerial
wider scope Economics
2.It has both Micro and Macro
1.Narrow and limited scope
in nature
2.It is essentially Micro in
3.It is both Normative
nature and Macro in analysis
and positive science
3.It is mainly a Normative
4.It is concerned with the
science 4.It is concerned with
formulation of theories
the application of theories and
and principles
principles of economics
5.It discusses general
5.It discusses Individual
problems
problems
 Nature of Managerial
Economics
 Science as well as Art of decision making.
 It is essentially Micro in nature but Macro
in analysis.
 It is mainly a Normative science but positive
in analysis.
 It is concerned with the application of theories
and principles of economics.
 It discusses Individual problems.
 It is dynamic in nature not a Static.
 It discuss the economic behavior of a firm.
 It concentrates on optimum utilization of
resources.
 Scope of Managerial
Economics
Objectives of a Firm.

Demand Analysis and Forecasting.

Production and cost analysis.

Pricing decisions.

Profit management.

Capital management.
 Managerial economics and
Decision Making
• Decision making:
– Decision making on internal affairs.
– Decision making on external affairs.
Internal affairs talk on internal environment which
consists of internal factors such as, Production,
Financial, Marketing and Human resource
related decisions.
External Affairs talk on external environment
which consists of external factors such as,
PEST related decisions.
 Decision
• Uncertainty:
Making
– Nothing can be expectable because
of the constant changes in the
environment both internally as well as
externally.
• Risk:
– It is the situation which comes under
uncertainty.
 Decision??????????????
?
How to take
decision????????????

By using….
Economic
Models
 Economic
Models
Economic model
is the structural and scientific method
of constructing or developing Solutions
by using basic economic principles,
concepts, theories and Quantitative
techniques such as mathematical and
statistical tools.
 Conclusion for
decisions.

ct
tru ls Evaluating results
ns de
co o
t o ic M Testing of
ps m Hypothes
Ste ono is

Ec Analysis of data using Basic

Principles of economics and
Quantitative Techniques.

Data collection

Formulation of
hypothesis

Defining
 Basic Principles of
Managerial
Economics
Opportunity cost
principle. Marginalism
principle.
Equi-marginalism principle.
Incremental principle.
Time perspective
 Opportunity Cost
Principle
Choice involves sacrifice.
The cost involved with the sacrifice
It is the cost of an next best opportunity
which is lost will be called as Opportunity
cost.
Ex: 100 Rs can be used for purchasing book
or eating in pizza corner or purchasing of
stationeries.
Now the cost of purchasing book is also
include the cost of ‘Eating pizza.’
Opportunity Cost in
Management
A Production possibility
C X curve

C Y
1

X
O D D1
B
 Marginalism
Principle
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
 Marginalism
Principle
• Marginal cost (MC)= (TC)n - (TC)n-1

• Marginal Revenue(MR)=(TR)n – (TR)n-1

Decision Rule:
MR >
MC…..MR=MC…..MR<MC
 Equi-marginalism
•
Principle
Allocation of scarce resources on different
alternative uses should be equally
distributed.
i.e. MPa = MPb =MPc
. =MPd
MPa = OrMPb = MPd
MPc = COPaCOPb COP
COPc d.
 Incremental
Principle
• Incremental principle gives an idea to
increase the production not only with one
more product it could be any quantity till
the profit exists.
• According to this principle profit can be
existed either by increasing sales or
total revenue or by decreasing total
cost
• Decision Rule,
• i.e. TC<TR……TC=TR……TC>TR
 Time Perspective
Principle
• According to the principle all decisions
should be under two formats i.e. short run
and long run, Because of the decisions
characteristics.
• So each decision should be made in Short
run basis as well as long run basis.
• According to short run decision the long
run decision will get change.
 Discounting
Principle
• According to this principle, if a decision
affects costs and revenues in long-run, all
those costs and revenues must be
discounted to present values before valid
comparison of alternatives is possible. This is
essential because a rupee worth of money at
a future date is not worth a rupee today.
Money actually has time value.
 Discounting
Principle
• This could be understood using the formula,

FV = PV*(1+r) t And
PV = FV/ (1+r) t

• Where, FV is the future value, PV is the

present value, r is the discount (interest) rate,
and t is the time between the future value
and present value.
 Quantitative Techniques used in
Managerial Economics

• Variables
• Functions
• Schedules
• Graphs
• Derivatives
• Differentiation
• Integration
etc…