MANAGERIAL ECONOMICS

Introduction
• Welcome to the course on managerial economics,
• This course is specially designed for the MBA students.
• And the motivation for this course comes from the fact that
managers needs clear understanding about the economic
concept, economic principles.
• And because the understanding of economic concept and
economic principle helps them in managing the day to day
problem associated with the business decision.
 Economics

• The word economics is derived from the Greek word okios

which means household.
• So basically this is the managements related to the
household.
• What was the study of household management to Greek
philosophers like Aristotle (384-322 BC) was the “study of
wealth” to the mercantilists in Europe between the
sixteenth and eighteenth centuries.
• Father of Modern Economics
• Adam Smith was an 18th-century Scottish
economist, philosopher, and author, and is
considered the father of modern economics.
• Smith is most famous for his 1776 book, "The
Wealth of Nations."
 Top 4 definitions of Economics

• 1. General Definition of Economics: The English word economics is derived

from the ancient Greek word oikonomia—meaning the management of a family
or a household.
• 2. Adam Smith’s Wealth Definition: (1723-90)
• Economics as a science of wealth which studies the process of production,
consumption and accumulation of wealth.
• 3. Marshall’s Welfare Definition: (1890)
• A study of men as they live and move and think in the ordinary business of life.”
He argued that economics, on one side, is a study of wealth and, on the other, is a
study of man.
• 4. Robbins’ Scarcity Definition: ( 1932)
 Top 4 definitions of Economics
• 4. Robbins’ Scarcity Definition: ( 1932)
• According to Robbins, neither wealth nor human welfare should be considered
as the subject-matter of economics.
• His definition runs in terms of scarcity:
• “Economics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.”
– Human wants are unlimited; wants multiply—luxuries become necessities
– Scarcity of resources is the fundamental economic problem to any society.
– Example
– A particular plot of land can be either used for jute cultivation or steel
production. If it is used for steel production, the country will have to
sacrifice the production of jute. So, resources are to be allocated in such a
manner that the immediate wants are fulfilled. Thus, the problem of
scarcity of resources gives rise to the problem of choice
• The science of political economy is growing and its area can never be
rigid. In other words, the definition must not be inflexible. Because of
modern research, many new areas of economics are being explored.
• Despite these, Cairncross’ definition of economics may serve
our purpose:
• “Economics is a social science studying how people attempt to
accommodate scarcity to their wants and how these attempts interact
through exchange.” By linking ‘exchange’ with ‘scarcity’, Prof. A. C.
Cairncross has added another cap to economics.
• However, this definition does not claim any originality since scarcity—the
root of all economic problems—had been dealt with elegantly by Robbins.
• That is why, Robbinson definition is more popular:
• Economics is the science of making choices. Modern economics is a
science of rational choice or decision-making under conditions of
scarcity.
• Human wants are unlimited
• Resources available to satisfy these wants
are scare /limited
• People want to maximize their gain
 Micro economics
• • Study of economic phenomena at micro
level i.e individual and firm level
• Microeconomics is the study of how
individual firms or consumers do and /or
should make economic decisions taking
constraints into account.
 Managerial economics
• Managerial economics is microeconomics
applied to decisions made by business
managers
• Manager
– A person who directs resources to achieve a stated
goal
• Economics
– The science of making decisions in the presence of
scarce resources
 Managerial Economics

• The study of how to direct scarce resources in

the way that most efficiently achieves a
managerial goal
 Managerial Economics According to Spencer:
“Managerial economics is the integration of
economic theory with business practice for purpose
of facilitating decision making and forward planning
by management”. ...

• It means management of limited funds available in

most economical way.
• Herbert Spencer (1820—1903), UK

• Herbert Spencer was an English

philosopher, biologist, anthropologist, and
sociologist
 Unit 1
• Managerial Economics - meaning, nature and
scope and business decision making - Role of
Managerial Economist - Fundamental
concepts of Managerial Economics. Demand
Analysis - meaning, determinants and types
of demand - Elasticity of demand.
 Unit 2
• Supply meaning and determinants -
production decisions - production
functions - Isoquants, Expansion path -
obb-Douglas function. Cost concepts -
cost - output relationship - Economies
and diseconomies of scale – cost
functions.
 Unit 3
• Market structure - characteristics -
Pricing and output decisions - methods
of pricing - differential pricing -
Government intervention and pricing
 Unit 4
• Profit - Meaning and nature - Profit policies -
Profit planning and forecasting – Cost volume
profit analysis - Investment analysis
 Unit 5
• National Income - Business cycle - inflation
and deflation - balance of payments -
Monetary and Fiscal Policies.
• Text Book
• Mehta P.L., Managerial Economics – Analysis & Cases, Sultan Chand,
• Reference Books
– Joel Dean - Managerial Economics, Prentice Hall. 2011
– Rangarajan .C, Dholakiabh - Principles of Macro Economics, Tata
McGraw Hill. 2012
– Howard Davies Pun-Lee Lam - Managerial Economics an Analysis
of Business Issues, Prentice Hall, 6th Edition. 2011
 The law of demand

• The law of demand states that, all other things

being equal, the higher the price of a good, the
less people will demand that good.

• In other words, the higher the price, the smaller

the quantity demanded.
 The law of supply

• Like the law of demand, the law of supply shows the

quantities that will be sold at a given price.
• But unlike the law of demand, the supply ratio shows an
upward slope.
• This means that the higher the price, the higher the quantity
supplied.
• Producers supply more at a higher price because selling a
higher quantity at a higher price increases revenue.
Nature of Economics
whether economics is an art or a science
• Economics is a science:
– Science is an organized branch of knowledge, that analyses
cause and effect relationship between economic agents.
– Further, economics helps in integrating various sciences
such as mathematics, statistics, etc. to identify the
relationship between price, demand, supply and other
economic factors.
– 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.
1.Economics is an art:
Managerial economics requires a lot of logical thinking and
creative skills for decision making or problem-solving
Economics has various branches like production, distribution,
consumption and economics, that provide general rules and
laws that are capable of solving different problems of society.

• Therefore, economics is considered as science as well

as art, i.e. science in terms of its methodology and
arts as in application.
Scope of Economics
 Micro economics:
– The part of economics whose subject
matter of study is individual units, i.e. a
consumer, a household, a firm, an industry,
etc. It analyses the way in which the
decisions are taken by the economic
agents, concerning the allocation of the
resources that are limited in nature.
– In managerial economics, managers generally deal
with the problems related to a particular organization
instead of the whole economy. Therefore it is
considered to be a part of microeconomics
 Macro Economics:
It is that branch of economics which studies the entire
economy, instead of individual units, i.e. level of output, total
investment, total savings, total consumption, etc. Basically, it
is the study of aggregates and averages. It analyses the
economic environment as a whole, wherein the firms,
consumers, households, and governments make decisions.
It covers areas like national income, general price level,
the balance of trade and balance of payment, level of
employment, level of savings and investment.
A business functions in an external environment, i.e. it serves
the market, which is a part of the economy as a whole
• The fundamental difference between micro and macro
economics lies in the scale of study. Further, in
microeconomics, more importance is given to the determination
of price, whereas macroeconomics is concerned with the
determination of income of the economy as a whole.
• Nevertheless, microeconomics and macroeconomics
are complementary to one another, as they both aimed at 

• Maximizing the welfare of the economy as a whole.

 Quiz
1. Which of the following is the best definition of managerial
economics? Managerial economics is

a. A distinct field of economic theory.

  b. A field that applies economic theory and the tools of
decision science.
  c. A field that combines economic theory and mathematics.
  d. None of the above.
 Answer 1

 b. A field that applies economic theory and the tools

of decision science.
 
2. Economics is a:
•  A.natural science.
•  B.social science.
•  C.managerial science.
•  D.business science.
 Answer 2
•  B.social science.
3. The best definition of economics is
• A) how choices are made under conditions of
scarcity.
• B) how money is used.
• C) how goods and services are produced.
• D) how businesses maximize profits.
 Answer 3
• A) how choices are made under conditions of
scarcity.
4. Scarcity is a condition that exists when
•   A. There is a fixed supply of resources.
•   B. There is a large demand for a product.
•   C. Resources are not able to meet the entire
demand for a product.
•   D. All of the above.
 Answer 4
• C. Resources are not able to meet the entire
demand for a product.
5. Which of the following is an example of a resource
constraint?
a. Pollution control laws
 b. Inadequate demand
 c. Excessive production costs
 d. Inadequate financial capital
 Answer 5

 d. Inadequate financial capital

6. The value of an economic theory in practice is determined
by
a. how accurate the assumptions are.
 b. how well the theory can be represented by a graph.
 c. how well the theory can predict or explain.
 d. how parsimonious the model is.
 Answer 6

 c. how well the theory can predict or explain.