Government of BBA College

S.Y BBA (Sem-III)

MANAGERIAL ECONOMICS

Dr. Pooja Patel

 Ch: 1 Introduction
What is Managerial Economics?
In management studies, the terms ‘Business Economics’ and Managerial Economics’ are often
synonyms. Both the terms, however, involve ‘economics’ as a basic discipline useful for certain functional
areas of business management.

Managerial economics is a stream of management studies which emphasizes solving business problems
and decision-making by applying the theories and principles of microeconomics and macroeconomics. It
is a specialized stream dealing with the organization's internal issues by using various economic theories.

Managerial Economics is the branch of economics. Including economic principles and concepts for the
analysis and solution of management problems of business organization and industries and future
planning.
 Definition of Managerial Economics

 “Economics decision making and forward planning” – Spencer & Siegelman

 “The purpose of managerial economics is to show how economic analysis can be
used in formulating business policies” – Joel Dea
 “Managerial Economics is the integration of Economics theory with business
practice to facilitating decision making and forward planning by management” –
W.W. Haynes
Nature of Managerial
Economics
 Nature of Managerial Economics
• The practical use of economic principles in managerial economics is used to
solve the future planning and problems of management.
• So, it is considered to be an ideal combination of Art and science.
• So, To know the nature of managerial economics, it is important to know whether
it is science or art or both.
1) Art and Science: Managerial economics requires a lot of logical thinking and
creative skills for decision making or problem-solving. It is also considered to
be a stream of science by some economist claiming that it involves the
application of different economic principles, techniques and methods, to
solve business problems.
2) Micro Economics: In managerial economics, managers generally deal with the
problems related to a particular organization instead of the whole economy.
3) Uses Macro Economics: it is essential for managers to analyse the different
factors of macroeconomics such as market conditions, economic reforms,
government policies, etc. and their impact on the organization.
4) Multi-disciplinary: It uses many tools and principles belonging to various
disciplines such as accounting, finance, statistics, mathematics, production,
operation research, human resource, marketing, etc.
5) Prescriptive / Normative Discipline: It acts as a tool in the hands of managers
to deal with business-related problems and uncertainties appropriately. It also
provides for goal establishment, policy formulation and effective decision
making. Managerial economics is a normative science. It is concerned with
what management should do under particular circumstance. It determines
the goals of the enterprise. Then it develops the ways to achieve these goals.
6) Pragmatic: It is a practical and logical approach towards the day to day
business problems.
 Scope of Managerial Economics
Demand Analysis and Forecasting: Managerial economics enables the business in analyzing
demand and forecasting future uncertainties. An accurate estimate of demand will help in
preparing the right production schedules and employing resources accordingly
Production and cost analysis: It helps in estimating the cost of production and determines factors
causing variations in cost estimates. Managerial economics properly analyses and decides
production activities and costs associated with them. It ensures that all resources are efficiently
utilized which reduces the overall cost.
Pricing policies: Pricing is one of the key decisions to be taken by every business organization for
earning the desired profits and attaining desired growth. Managerial economics supplies all
relevant data to managers for deciding the right prices for products. Key aspects covered under
• Capital management: Capital investment decisions is one of the most challenging
and complex tasks before every manager. Managerial economics helps in
planning and managing all capital expenditures of business which requires huge
investment. It properly analyses investment avenues before investing any amount
into it to ensure the profitability of an investment.

• Profit management: Managerial economics helps in managing the profit of

business organizations. Profit is the main measure for the success or growth of
firm in the long run. It helps in making correct estimates of all cost and revenue
at different levels of outputs which helps in earning the desired profit.
 Relation of Managerial Economics with other
Disciplines / Branches of Knowledge
• Managerial Economics and Economics: Managerial Economics is economics applied to decision making.
Micro-economics: ‘Micro’ means small. It studies the behaviour of the individual units and small groups
of units. It is a study of particular firms, particular households, individual prices, wages, incomes,
individual industries and particular commodities. Thus micro-economics gives a microscopic view of the
economy.
The roots of managerial economics spring from micro-economic theory. In price theory, demand concepts,
elasticity of demand, marginal cost marginal revenue, the short and long runs and theories of market structure
are sources of the elements of micro-economics which managerial economics draws upon. It makes use of
well known models in price theory such as the model for monopoly price, the kinked demand theory and the
model of price discrimination.
Macro-economics: ‘Macro’ means large. It deals with the behaviour of the large aggregates in the economy.
The large aggregates are total saving, total consumption, total income, total employment, general price
level, wage level, cost structure, etc. Thus macro-economics is aggregative economics. Macro-economies is
also related to managerial economics.
The environment, in which a business operates, fluctuations in national income, changes in fiscal and
monetary measures and variations in the level of business activity have relevance to business decisions. The
understanding of the overall opera­tion of the economic system is very useful to the managerial economist in
the formulation of his poli­cies.
• Managerial Economics and Operations Research: Mathematicians, statisticians,
engineers and others join together and developed models and analytical tools
which have grown into a specialised subject known as operation research.
The basic purpose of the approach is to develop a scientific model of the system
which may be utilised for policy making.
• Managerial Economics and Statistics:
                Statistics is important to managerial economics. It provides the basis for
the empirical testing of theory. It provides the individual firm with measures of
appropriate func­tional relationship involved in decision making. Statistics is a very
useful science for business execu­tives because a business runs on estimates and
probabilities.
                Statistics supplies many tools to managerial economics. Suppose
forecasting has to be done. For this purpose, trend projections are used. Similarly,
multiple regression technique is used. In managerial economics, measures of
central tendency like the mean, median, mode, correlation, regression, least
square, estimators are widely used.

                Statistical tools are widely used in the solution of managerial problems.
For eg. sampling is very useful in data collection. Managerial economics makes use
of correlation and multiple regression in business problems involving some kind of
cause and effect relationship.
• Managerial Economics and Accounting:

         Managerial economics is closely related to accounting. It is recording the

finan­cial operation of a business firm. A business is started with the main aim of
earning profit. Capital is invested / employed for purchasing properties such as
building, furniture, etc and for meeting the current expenses of the business.

Man­agement accounting provides the accounting data for taking business

decisions. The accounting tech­niques are very essential for the success of the firm
because profit maximization is the major objective of the firm.
• Managerial Economics and Mathematics:
•                Mathematics is another important subject closely related to managerial
economics. For the derivation and exposition of economic analysis, we require a set
of mathematical tools. Mathematics has helped in the development of economic
theories and now mathematical economics has become a very important branch of
economics.
•                 Mathematical approach to economic theories makes them more precise
and logical. For the estimation and prediction of economic factors for decision mak­
ing and forward planning, mathematical method is very helpful. The important
branches of math­ematics generally used by a managerial economist are geometry,
algebra and calculus.
•                 The mathemati­cal concepts used by the managerial economists are the
logarithms and exponential, vectors and deter­minants, input-out tables. Operations
research which is closely related to managerial economics is mathematical in
character.
• (Input-Output Tables (IOTs) describe the sale and purchase relationships between
producers and consumers within an economy)
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