MANAGERIAL ECONOMICS

“PRINCIPLES OF MANAGERIAL ECONOMICS”

SUBMITTED FOR THE AWARD OF
MASTER OF BUSINESS ADMINISTRATION
UNDER THE GUIDANCE OF
DR.BABITA YADAV

DR HARI SINGH GOUR UNIVERSITY, SAGAR (M.P)

SUBMITTED BY
KARTHIK M MUHAMMED FASIL PK
KARAN KHULBE MUHAMMED RASHEEQUE TC
MUHAMMAD NASIF PK NAMAN JAIN
MUHAMMAD MUFLIH MUSTHAFA
PRINCIPLES OFMANAGERIAL
ECONOMICS
 MANAGERIAL ECONOMICS
 Prof. Evan J Douglas defined “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.
 Managerial economics is a branch of economics involving the application of economic
methods in the organizational decision-making process. Economics is the study of the
production, distribution, and consumption of goods and services. Managerial
economics involves the use of economic theories and principles to make decisions
regarding the allocation of scarce resources. It guides managers in making decisions
relating to the company's customers, competitors, suppliers, and internal operations.
 Managers use economic frameworks in order to optimize profits, resource
allocation and the overall output of the firm, whilst improving efficiency
and minimising unproductive activities. These frameworks assist organisations to
make rational, progressive decisions, by analysing practical problems at both micro
and macroeconomic levels. Managerial decisions involve forecasting (making
decisions about the future), which involve levels of risk and uncertainty. However,
the assistance of managerial economic techniques aid in informing managers in
these decisions.
PRINCIPLES OF MANAGERIAL ECONOMICS
 INCREMENTAL PRINCIPLE
 MARGINAL PRINCIPLE
 DISCOUNTING PRINCIPLE
 TIME PERSPECTIVE PRINCIPLE
 EQUI-MARGINAL PRINCIPLE
 1.INCREMENTAL
PRINCIPLE
- In managerial economics,the incremental principle
refers to the the analysis of decisions by focusing on
the changes in costs and benefits that result from a
particular decision.
COMPONENTS OF INCREMENTAL PRINCIPLE
(1)Incremental cost: Incremental cost may be
defined as the change in total cost resulting
COMPONENTS OF from a particular decision.
INCREMENTAL PRINCIPLE

INCREMENT INCREMENT
AL COST AL REVENUE
(2)Incremental revenue: Incremental revenue
means the change in total revenue resulting
from a particular decision.
CONCLUSION:
Incremental principle states that a decision is profitable
if revenue increases more than costs; if costs reduce
more than revenues; if increase in some revenues is
more than decrease in others; and if decrease in some
costs is greater than increase in others.
Marginal Principle
The marginal principle is the idea that
decisions should be based on the
incremental cost-benefit analysis of a
small change in one variable.
Applications of the Marginal Principle

1 Microeconomics
The marginal principle is a cornerstone of microeconomic
analysis, where it is used to model consumer behavior, firm
behavior, and market equilibrium.

2 Business
The principle is widely used in business management, finance,
and marketing, where it helps managers make decisions about
pricing, production, investment, and customer segments.

3 Public Policy
The principle is used in public policy analysis, especially in cost-
benefit analysis of government regulations, social programs,
and environmental policies.

4 Environmental Management
The principle is applied in environmental management, where
it helps decision makers balance the costs and benefits of
various ecosystem services and natural resources.
Benefits of the Marginal Principle
1 Rational Decision Making
The principle helps decision makers
avoid biases, fallacies, and
emotional factors that often
interfere with rational decision
making.
2 Efficiency and Effectiveness
The principle leads to more efficient
and effective decisions by focusing
on the incremental changes that
can have the biggest impact.

3 Flexibility and Adaptability

The principle allows decision makers to adjust their choices and strategies based on
new information and changing circumstances.
 OPPORTUNITY COST PRINCIPLE
 Opportunity cost principle is related and applied to
scarce resources. When there are alternative uses
of scare resources, one should know which best
alternative is and which is not. We should know
what gain by best alternative is and what loss by
left alternative is.
 In managerial economics, the opportunity cost
concept is useful in decision involvinga choice
between different alternative course of action.
The concept of opportunity cost implies three
things:
I. The calculation of opportunity cost involves the
measurement of sacrifices
II. Sacrifices may be monetary or real
III. The opportunity cost is termed as the cost of
sacrified alternatives
In managerial decision making, the concept of
opportunity cost occupies an important place.
The economic significance of opportunity cost it
as follows:
I. It helps in determining relative prices of different
goods.
II. It helps in determining normal remuneration to a
factor of production.
III. It helps in proper allocation of factor resource.
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 can be defined as a process
used to transform future dollars into an equivalent number of present
dollars. For instance, $1 invested today at 10% interest is equivalent to $1.10
next year.
 FV = PV*(1+r)t
 Where, FV is the future value (time at some future time), PV is the present
value (value at t0, r is the discount (interest) rate, and t is the time
between the future value and present value
 FV = PV*(1+r)t
 Where, FV is the future value (time at some future time), PV is the present
value (value at t0, r is the discount (interest) rate, and t is the time
between the future value and present value
 For example, a bond of face value Rs 10,000 issued at a 10% discount today
at Rs 9,000. An investor who purchases the bond today will redeem the
same face value at the end of the tenure.
Discounting policies are used in a variety of managerial decisions, such as:

 Pricing:* Managers may offer discounts on products or

services to attract customers who are more price-sensitive
or to encourage early purchase.
 Capital budgeting : When evaluating investment projects,
managers use discounting to compare the present value of
the project's expected cash inflows to the present value of
its costs.
 Inventory management:* Managers need to balance the
cost of holding inventory with the risk of running out of
stock. Discounting can be used to incentivize customers to
buy products before they go out of stock.
 PRINCIPLES OF MANAGERIAAL ECONOMICS

TIME PERSPECTIVE
PRINCIPLE

BY KARTHIK M
 TIME PERSPECTIVE
PRINCIPLE

According to this principle, a manger/decision maker should give

due emphasis, both to short-term and long-term impact of his
decisions, giving apt significance to the different time periods
before reaching any decision.
Short-run refers to a time period in which some factors are fixed while
others are variable. The production can be increased by increasing the
quantity of variable factors. While long-run is a time period in which all
factors of production can become variable. Entry and exit of seller firms
can take place easily.

From consumers point of view, short-run refers to a period in which they

respond to the changes in price, given the taste and preferences of the
consumers, while long-run is a time period in which the consumers have
enough time to respond to price changes by varying their tastes and
preferences.
 CONCLUSION
This is a valuable tool in managerial economics and is used to emphasize the
importance of considering the timing of costs and benefits in decision-making,
considering factors such as inflation and interest rates.

A manger/decision maker should give due emphasis, both to short-term and

long-term impact of his decisions, giving apt significance to the different time
periods before reaching any decision.
 Equi-marginal principle

The equi-marginal principle, also known as the law of

equi marginal utility or gossen’s second law, implies
that a consumer will distribute his/her income on
various commodities in a manner that marginal utility
derived from the last unit of money spent on each
good is equal.
By adhering to the equi-marginal principle, you can
ensure the maximum utilization of available resources,
contributing both to effectiveness and efficiency.
The equimarginal principle states that consumers will choose a combination of goods to
maximise their total utility. This will occur where

 The consumer will consider both the marginal

utility MU of goods and the price.
 In effect, the consumer is evaluating the
MU/price.
 This is known as the marginal utility of
expenditure on each item of good.
 Example
Units MU good A MU Good B  Equi-marginal utility of goods-
1 40 22

2 32 20  Suppose the price of good A and good B was

£1.
3 24 18
 Then the optimum combination of goods
4 16 16
would be quantity of 4.
5 8 14
 Because at quantity of 4 – 16/£1 = 16£1
6 0 12
 CONCLUSION
In conclusion, managerial economics is a broad and complex field that blends
economic theory and business decision-making. It provides the tools for managers to
make informed decisions by analysing changes in demand, supply, cost structure,
competition, technological innovations, and other factors. Managerial economics also
uses various frameworks, such as game theory and linear programming to help solve
business problems.
By studying these fundamental of managerial economics, managers can gain insight
into how their decisions will affect their organisations overall performance in terms of
probability or market share. Ultimately, this knowledge helps them make better
decisions to increase profits while minimising costs.