MANAGERIAL ECONOMICS

Prof.M.VENUGOPAL NAIDU

MODULE 1

INTRODUCTION TO ECONOMICS
1. Meaning of Economics
2. Micro & Macro Economics
3. Definition of Managerial Economics
According to spencer and Siegelman,
“Managerial Economics is the integration of
Economic Theory with Business Practice for
the purpose of facilitating decision-making
and forward planning by management”
4. Kinds of Economic Decisions:-
A. What to produce
B. How to produce
C. For whom to produce
 ECONOMIC PRINCIPLES RELEVANT
TO MANAGERIAL DECISION MAKING
1. Opportunity Cost
2. Marginal Principle
3. Incremental Principle
4. Equi-Marginal Principle
5. Scarcity Principle
6. Principle of Time Perspective
7. Discounting Principle
 ROLE OF MANAGERIAL
ECONOMIST
1. Analysis of External factors
2. Analysis of Internal factors
3. Specific Functions
a. Sales Forecasting
b. Market Research
c. Advice on Foreign Exchange
d. Pricing problems of the Industry
 RESPONSIBILITIES OF MANAGERIAL
ECONOMIST
1. To Make Reasonable profits on capital
Employed.
2. Successful Forecasting
3. Knowledge of Sources of Economic
Information
4. His status in the firm
5. Analysis of External Factors
6. Analysis of Internal Factors
7. Specific Functions
 ECONOMIC PRINCIPLES RELEVANT
TO MANAGERIAL DECISION MAKING
1. Opportunity Cost
2. Marginal Principle
3. Incremental Principle
4. Equi-Marginal Principle
5. Scarcity Principle
6. Principle of Time Perspective
7. Discounting Principle
PRODUCTION POSSIBILITY
CURVE [ P.22]
 MEANING OF ECONOMICS

Economics deals with the economic

problems of the individuals, business
units, society and the world
 REASONS FOR ECONOMIC PROBLEMS

1. UNLIMITED WANTS

2. LIMITED RESOURCES

3. USE OF ALTERNATIVE RESOURCES

4. THE PROBLEM OF CHOICE

All the four factors are inter- connected to each

other and are collectively responsible for creating
economic problem
 SUBJECT MATTER OF ECONOMICS

The subject matter of Economics can be

divided into two parts

MICRO ECONOMICS

MACRO ECONOMICS
 DIFFERENCES
MICRO ECONOMICS
1. It is a study of small parts
of the economy
2. It is a study of individual
units of the economy
3. It gives a partial picture of
the economy
4. It is a traditional approach
to economics
5. It covers limited area of
study
MACRO ECONOMICS
1. It is a study of large parts
of the economy
2. It is a study of the whole
economy
3. It gives total picture of the
whole economy
4. It is a modern approach
to economics
5. It covers a wider scope
 Contd..
6. It is based on the assumption
of full-employment, perfect
competition etc.
7. It is mainly a study of price
theory
8. It is called as slicing method
9. It is called as partial
equilibrium analysis
10. It gives us a worms’ eye
view of the economy
11. It studies individual who is
mortal
6. It is not based on such
assumptions
7. It is a study of income &
employment
8. It is called as lumping
method
9. It is called as general
equilibrium analysis
10. It gives us a birds’ eye
view of the entire economy
11. It studies the society,
which is immortal
Meaning of Managerial Economics

Managerial Economics is a science

which deals with the application of
economic Theories, principles and
concepts to Business Management in
order to solve managerial and business
problems. In short it is economics
applied in decision making.
 In recent years Managerial Economics is
also referred to as Business Economics,
Economics of Business Management,
Applied Economics & so on.
 Definition of Managerial
Economics

1. According to Milton.H.Spencer and Louis

Siegelman, “Managerial Economics is the
Integration of Economic theory with Business
Practice for the purpose of facilitating decision-
making and forward planning by management”
2. According to Pappas and Brigham,
“Managerial Economics is the application of
Economic Theory and methodology to
business administration practice.”
 Scope (or) Subject matter of
Managerial Economics
Ref: Varshney & Maheshwari - P-7
The following aspects or topics may generally
fall under managerial economics
1.Demand Analysis & Forecasting
2.Cost Analysis
3.Production & Supply Analysis
4.Price Decisions, Policies & Practices
5.Profit Management &
6.Capital Management
7.Environmental issues (ref: Dwivedi – P – 8)
Significance (or) Importance of
Managerial Economics
Ref: Prof.K.D.Basava Pg 13
1. Provides tools & techniques

2. Provides Concepts

3. Answers the Basic Problems

4. Supplies the Data

5. Helps in forecasting

6. Guides the Managerial Economist

 Nature of Managerial Economics

1. Managerial economics is micro economics in nature.

2. Managerial economics makes use of the theory of

firm or economics of the firm by and large.

3. Managerial economics is basically pragmatic

4. Managerial economics is a normative science rather

than a positive science.
Contd..

5. M.E. makes use of macro –economics since the

later provides an intelligent understanding of the
environment in which the business firm must
operate.

6. ME makes use of the most modern tools of

statistics ,mathematics and operations research.
7. M.E. gives due importance to non economic
factors.

8. M.E. adopts a realistic approach followed by

the firm in the practical world.
 SIGNIFICANCE & APPLICABILITY OF MANAGERIAL
ECONOMICS IN DECISION MAKING

1. Production Decisions

2. Inventory Decisions

3. Cost Decisions

4. Marketing Decisions

5. Investment Decisions

6. Personnel Decisions
 RESPONSIBILITIES OF A MANAGERIAL
ECONOMIST
Ref: Varshney & Maheshwari - PG 26

1. To work honestly to make profit on invested

capital

2. Strive to make successful or accurate forecast

3. Intellectual ability to be in tune with industry

requirements
Decision Making & Forward
Planning
 Decision Making Process in
Managerial Economics

Estimate the likely demand for the product of

the firm which it has decided to produce

Obtain information on input supplies and the

technologies available for production of the
desired product
 To decide the output to be produced by the
firm

Once the level of output is decided, the input

decisions are made in the light of the
information on production processes and input
prices prevailing in the market
 Factors Influencing Managerial
Decisions

External factors

Internal Factors
 External Factors
1. Current Trends in National & International
Economies

2. Phase of Business cycle

3. Change in size of population & change in purchasing

power

4. Increase & decrease in competition

5. Government & economic policies

 Internal factors

1. Type of technology to be adopted

2. Strategies to be adopted in market

3. Profit budget for the coming year

4. Factors influencing the input cost

RELATIONSHIP OF MANAGERIAL
ECONOMICS WITH FUNCTIONAL
AREAS OF BUSINESS
 M.E. & ECONOMICS
• M.E. described as economics applied to
decision making
• Special branch bridging gulf b/w pure
economic theory & managerial practice
• Microeconomics – main source of concepts
& analytical tools for M.E.
• Macroeconomics – responsible in the area of
forecasting for M.E.
 Contd…
• Economic concepts useful & frequently
applied
– Price Elasticity of Demand
– Income Elasticity of Demand
– Opportunity Cost
– Theory of the Firm
– Demand Theory
– Theory of International Trade
– Money & Banking, etc.
 M.E. & Statistics
• M.E. requires collection of quant data which
can be used to measure certain functional
relationships for making decisions
• For example, pricing decisions
• Uncertainty of future events solved by
Theory of Probability
 M.E. & Mathematics
• Metric in Character; estimates economic
relationships
• Predicting relevant economic quantities to use
them in making decisions and forward planning
• Knowledge of Geometry, Trigonometry & Algebra
with Logarithms, Exponentials, Vectors,
Determinants & Matrix Algebra, Differential &
Integral Calculus are very essential to M.E.
 M.E. & Accounting
• Closely related; concerned with recording
the financial operations of a business firm
• Accounting info – one of the principal
sources of data required for making
decisions
• For example, Profit & Loss Statement of a
firm
• Main task is to provide data; applying ideas
of M.E. to solve problems
 M.E. & OR
• Important problems solved with OR
techniques
• Problems –
– Allocation problems
– Competitive problems
– Waiting Line problems
– Inventory problems