CHAPTER - 1

INTRODUCTION-
MANAGERIAL ECONOMICS
Economics

• Meaning:
Economics is a social science concerned with
the production, distribution, and
consumption of goods and services. ...
Economics can generally be broken down
into macroeconomics, which concentrates on
the behavior of the aggregate economy, and
microeconomics in character as it
concentrates only on the study of the firm
and not on the working of the economy.
Managerial Economics
Manager
A person who directs resources to achieve a
stated goal.
Economics
The science of making decisions in the
presence of scare resources.
Managerial Economics
The study of how to direct scarce resources in
the way that most efficiently achieves a
managerial goal.
 Managerial Economics
Meaning: It is the application of economic
concepts ,theories ,tools and methodologies to
solve problems in business. It enables decision
making.
Managerial Economics is economics applied in
decision-making Link between abstract theory
and managerial practice. Analysis for
identifying problems, organizing information
and evaluating alternatives.
Spencer and Siegelman point to the
fact that “Managerial Economics.. is
the integration of economic theory
and business practice for the
purpose of facilitating decision-
making and forward planning by
management.”
What is Managerial Economics
 Managerial Economics help firms make
difficult business decision such as:
Whether it should purchase components
from other manufacturers or produce
them within the firm?
 Whether it should specialize in making
one type of product or produce several
different types?
 How many products is to produce, and at
what price should it sells them?
Factors that contributed for the emergence of
Managerial Economics

 Growing complexity of business decision-

making processes.
 Increasing need for the use of economic logic,
concept, theories, and tools of economic
analysis in the process of decision-making.
 Rapid increases in the demand for
professionally trained managerial manpower.
 Managerial economics is micro-economic in
character as it concentrates only on the study of
the firm and not on the working of the economy.
 Managerial economics takes the help of macro-
economics to understand and adjust to the
environment in which the firm operates.
 Managerial economics is normative rather than
positive in character.
 It is both conceptual (theory) and metrical
(quantitative techniques).
 The contents of managerial economics are based
mainly on the “theory-of firm’.
Significance of Managerial Economics
 In order to enable the manager to
become a more competent model
builder, managerial economics provides
a number of tools and techniques.
 Managerial economics provides most of
the concepts that are needed for the
analysis of business problems.
 Managerial economics is helpful in
making decisions.
 Evaluating choice of alternatives.
In Managerial Economics - Manager will be
required to collect and analyze information on:
 Available production techniques
 Cost of production associated with each
production technique
 Supply position of inputs required for the
production process;
 input prices;
 Production costs of the competitive products;
and,
 Availability of foreign exchange, if inputs are
to be imported.
Regarding the sales prospects and problems, the
manager will be required to collect and analyze data
on:
(a) General market trends;
(b) The industrial business trends;
(c) Major existing and potential competitors, as well
as their respective market shares;
(d) Prices of the competing products;
(e) Pricing strategies of the prospective competitors;
(f) Market structure and the degree of competition;
(g) The supply position of complementary goods.
Importance of Managerial Economics
1. Building of analytical models that help to recognize
the structure of managerial problems, eliminate the
minor details that can obstruct decision making, and
help to concentrate on the main problem area.
2. Making available a set of analytical methods for
business analyses thereby, enhancing the analytical
capabilities of the business analyst.
3. Clarifications of the various concepts used in
business analysis - enabling the managers avoid
conceptual pitfalls.
 Scope of Managerial Economics
Scope of managerial economics extends to those
economic concepts, theories, and tools of analysis
used in analyzing the business environment, and
to find solutions to practical business problems. In
broad terms, managerial economics is applied
economics.
The area of business issues to which economic
theories can be directly applied is divided into two
broad categories:
i. Operational or internal issues, and
ii. Environment or external issues
Operational problems -are of internal nature..
Some of the basic internal issues :
(a) Choice of business and the nature of product
(what to produce);
(b) Choice of size of the firm (how much to produce);
(c) Choice of technology (choosing the factor
combination);
(d) Choice of price (product pricing);
(e) How to promote sales;
(f) How to face price competition;
(g) How to decide on new investments;
(h) How to manage profit and capital;
and,
(i) How to manage inventory.
The microeconomic theories dealing with most
of these internal issues include, among others:
a. The theory of demand, which explains the
consumer behavior in terms of decisions on
whether to buy or not to buy a commodity and
the quantity to be purchased.
b. Theory of Production and production
decisions. The theory of production or theory of
the firm explains the relationship between
inputs and output.
c. Analysis of Market structure and Pricing theory.
Price theory explains how prices are determined
under different market conditions.
d. Profit analysis and profit management. Profit
making is the most common business objective.
However, making a satisfactory profit is not always
guaranteed due to business uncertainties. Profit
theory guides firms in the measurement and
management of profits, in making allowances for
the risk premium, in calculating the pure return on
capital and pure profit, and for future profit
planning.
e. Theory of capital and investment
decisions - Capital is the foundation of any
business. It efficient allocation and
management is one of the most important
tasks of the managers, as well as the
determinant of the firm’s success level.
Some of the important issues related to
capital include: choice of investment
project; assessing the efficiency of capital;
and, the most efficient allocation of
capital.
 Environmental issues are issues related to
the general business environment. These are
issues related to the overall economic, social, and
political atmosphere of the country in which the
business is situated. The factors constituting
economic environment of a country include:
a. The existing economic system
b. General trends in production, income,
employment, prices, savings and investment, and
so on.
c. Structure of the financial institutions.
d. Magnitude of and trends in foreign trade.
e. Trends in labor and capital markets.
f. Government’s economic policies.
g. Social organizations, such as trade unions,
consumers’ cooperatives, and producer unions.
h. The political environment.
i. The degree of openness of the economy
Managerial economics focus on business cycles,
economic growth, and content and logic of some
relevant government activities and policies which
form the business environment.
Road ahead for the next unit..