An overview of Managerial Economics

Dr.Usha Nori
Introduction to Economics
Economics is the study of how society manages its scarce
resources
Economists study how people make decisions , how much
they work, what they buy, how much they save, and how
they invest their savings.
 Economics is the science of making decisions in the presence of
scarce resources
Economics is the science which studies human behaviour as
a relationship between ends and scarce means which have
alternative uses
Economics is a positive science
Our wants are unlimited
Our resources are limited/scarce
Resources can be put to alternative uses
Decisions are important because scarcity implies that
by making one choice, you give up another.
Economic decisions thus involve the allocation of
scarce resources, and a manager’s task is to allocate
resources so as to best meet the manager’s goals.
Stages of developing economics
Wealth concept- Adam Smith, John Stuart Mill
Welfare concept- Alfred Marshal
Scarcity concept- Robbins
Development concept- Modern Economist- Samuelson

Important features:
Choice making
Judicious use of resources
Suggest ways and means to solve economic problems
Primary job of economists therefore is the distribution of
the resources in the most efficient and equitable manner.
Definitions of Managerial Economics
McNair and Meriam, “Managerial economics is the use of
economic modes of thought to analyse business situations
According to Prof. Evan JDouglas, ‘Managerial economics’
is concerned with the application of economic principles
and methodologies to the decision making process within
the firm or organisation under the conditions of
uncertainty”
Spencer and Siegelman define it as “The integration of
economic theory with business practices for the purpose of
facilitating decision making and forward planning by
management
Hailstones and Rothwel, “Managerial economics is the
application of economic theory and analysis to practice of
business firms and other institutions.
1. Choices and decisions
2. using scare resources
 a. Time b. Money
3. Human action- purposeful behavior
4. scarcity- geographical implications
5. trade off- opportunity cost
6. Marginal analysis
7. Efficiency and Productivity
8. Means- resources= inputs : land
 natural resources
 Time
 capital
9. Utility
10. Goods (economic good)

Branches of economics
a. Micro- Individuals (Hhs), Firms= businesses
b. Macro – extension of micro- overall economy
GDP, Stock markets, Trade deficits, Inflation, unemployment,
exchange rate
11. Markets: Capital, goods & services (product market), labor
market
12. Models
 Theory
 variables
 assumptions
 causation
Ten Principles of Economics
How people make decisions
Principle 1: People face tradeoffs- to get one thing that we like, we usually
have to give up another thing that we like. Making decisions requires trading
off one goal against another.
Trade off between efficiency and equity
Efficiency- society is getting the most it can from its scarce resources
Equity – The property of distributing economic prosperity fairly among the
members of society.

For example, tax paid by wealthy people and then distributed to poor may
improve equality but lower the incentive for hard work and therefore reduce the
level of output produced by our resources.
This implies that the cost of this increased equality is a reduction in the efficient
use of our resources.
Another Example is “guns and butter”: The more we spend on national
defense(guns) to protect our borders, the less we can spend on consumer
goods (butter) to raise our standard of living at home.
Just as individuals cannot have everything they want and must
instead make choices, society as a whole cannot have
everything it might want, either.
We explain the constraints society faces, using a model called
the production possibilities frontier (PPF). There are more
similarities than differences between individual choice and
social choice.
Suppose a society desires two products, healthcare and
education. The production possibilities frontier in the figure
illustrates the concept.
The society faces trade off.
The Production Possibilities Frontier and Social Choices
Productive Efficiency and Allocative Efficiency
The PPF and Comparative Advantage
Principle 2
The cost of something is what you give up to get it
Making decisions requires comparing the costs and
benefits of alternative courses of action.
Opportunity cost- is an item what you give up to get
that item.
Principle 3
Rational people think at the margin
Marginal changes- small incremental adjustments to a
plan of action
Examples : Examinations
 Having dinner
Decision of an airline to charge passengers who fly
standby
Principle 4
People respond to incentives
Example- a tax on gasoline encourages people to drive
smaller, more fuel-efficient cars.
Principle 5:
Trade can make everyone better off
Trade between two countries can make each country
better off. Trade allows each person to specialize in the
activities he or she does best, whether it is farming,
sewing, or home building. By trading with others,
people can buy a greater variety of goods and services
at lower cost.
Principle 6
Markets are usually a good way to organize economic
activity
Central planning vs. market economies
The theory behind central planning was that only the
government could organize economic activity in a way
that promoted economic well-being for the country as
a whole.
Market economy- an economy that allocates resources
through the decentralized decisions of many firms and
households as they interact in markets for goods and
services.
Principle 7
Governments can sometimes improve market outcomes
Although markets are usually a good way to organize
economic activity, this rule has some important exceptions.
There are two broad reasons for a government to intervene in
the economy: to promote efficiency and to promote equity.
That is, most policies aim either to enlarge the economic pie or
to change how the pie is divided.
Market failure- a situation in which a market left on its own
fails to allocate resources efficiently
Externality- the impact of one person’s actions on the well-
being of a bystander.
Market power- the ability of a single economic actor (or small
group of actors) to have a substantial influence on market
prices.
Principle 8
A country’s standard of living depends on its ability to
produce goods and services
The differences in living standards around the world
are staggering. Changes in living standards over time
are also large. What explains these large differences in
living standards among countries and overtime.
Almost all variation in living standards is attributable
to differences in countries’ productivity.
Productivity- the amount of goods and services
produced from each hour of a worker’s time.
Principle 9 and 10
Prices rise when the government prints too much money
Principle 10:
Society faces a short-run trade off between inflation and
unemployment
Government polices
When the government reduces the quantity of money, for
instance, it reduces the amount that people spend. Lower
spending together with prices that are stuck too high,
reduces the quantity of goods and services that firms sell.
Lower sales, in turn, cause firms to lay off workers. Thus,
the reduction in the quantity of money raises
unemployment temporarily until prices have fully adjusted
to the change.
 ECONOMIC ISSUES AND CONCEPTS

The Complexity of the Modern Economy

A market economy is self-organizing in the sense that
when individuals act independently to pursue their own
self-interest, responding to prices set on open markets,
they produce co-ordinated and relatively efficient
economic activity.
 ECONOMIC ISSUES AND CONCEPTS

Resources and Scarcity

Scarcity is a fundamental problem faced by all economies
because not enough resources - land, labour, capital, and
entrepreneurship - are available to produce all the goods
and services that people would like to consume.
Scarcity makes it necessary to choose among alternative
possibilities: what products will be produced and in what
quantities.
 ECONOMIC ISSUES AND CONCEPTS

The concept of opportunity cost emphasises scarcity and choice by

measuring the cost of obtaining a unit of one product in terms of
the number of units of other products that could have been
obtained instead.
A production-possibility boundary shows all of the combinations
of goods that can be produced by an economy whose resources are
fully employed.
Movement from one point to another on the boundary shows a
shift in the amounts of goods being produced, which requires a
reallocation of resources.
 ECONOMIC ISSUES AND CONCEPTS

Who Makes the Choices and How

 Modern economies are based on the specialization and division
of labour, which necessitate the exchange of goods and services.
 Exchange takes place in markets and is facilitated by the use of
money.
 Much of economics is devoted to a study of how markets work to
co-ordinate millions of individual, decentralized decisions.
 Three pure types of economy can be distinguished: traditional,
command, and free market.
 In practice, all economies are mixed economies in that their
economic behaviour responds to mixes of tradition, government
command, and price incentives.