Module 1

Introduction to Managerial
Economics
mirjam nilsson
 Learning Outcomes :
1. Discuss economics and its
importance to man’s economic life.
2. Differentiate microeconomics and
macroeconomics .
3. Explain the difference between
positive and normative economics .
4. Analyze the importance of
managerial economics to individual
and business decision making.

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 Teaching Strategy :
• Direct Instruction through
PowerPoint DO
SOMETHING
• Discussions
GREAT !
• Oral Recitation
• Pre and Post Tests
• Purpose Assignment

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 Ignacian Core and Related
Values : Excellence and Self-
Reliance
Bible Verse : Lk 19:26
He replied , “ I tell you that to
everyone who has , more will
be given , but as for the one
who has nothing , even what
they have will be taken away.
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Reflections :
For the followers of Jesus the
lesson is that those who work
diligently find that their
ability increases, and so they
are given more responsibility.
Those who are lazy find that
they lose whatever ability
they have, and cannot be
trusted with any further
responsibility .
4
 Broadening of Concept
Managerial economics is the branch of
knowledge in which theories of economic
analysis are used for solving business
management problems and determination
of business policies.

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 • Managerial economics assists the managers of
firms in rational solutions of obstacles faced in
the firm’s activities.
• It makes use of economic theory and concepts.
• It helps in formulating logical managerial
decisions.
• Managerial economics uses economic theory to
solve business decision making problems .

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 Definition of Managerial Economics
Application of economic tools and techniques to
business and administrative decision making.
Helps decision makers recognize how economic forces
affect organizations and describes the economic
consequences of managerial behavior.
How ?
By linking economic concepts and quantitative
methods to solve managerial problems.

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 Other Definitions of Managerial Economics
“Integration of economic DECISION
theory with business practice MAKING
“Selecting one out of a
for the purpose of facilitating
set of two or more
decision making and forward
alternatives or in other
planning by management.”
words making a choice.”
Spencer and Siegelman

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Economics
 These are activities of man which are concerned
with income or earnings and spending of money.
 For the successful handling of these activities,
certain laws and rules are formulated which are
known as “theories of economics.”
 The use of these rules and tools, provided for
analyzing business conditions and applying them
at various economic decision is known as
managerial economics.
 Microeconomics and Macroeconomics
Microeconomics
• Derived from the Greek word Mikros meaning “
small”.
• Microeconomics studies economic relationship of
economic problems at the level of an individual
household or an individual consumer .
• It is basically concerned with determination of
output and price for an individual firm or industry.
• Deals with the theory of decision making by
individual , consumers, resource owners, and
business firms in a free market economy.

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 Macroeconomics
• Derived from the Greek word makros
meaning”large”
• Macroeconomics studies economic relationships
or economic problems at the level of the
economy as a whole . ( e.g. study of
unemployment, inflation, per capita income )
• It is basically concerned with determination of
aggregate output and general price level in the
economy as a whole.

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 Theories of Economics
Set of concepts and principles that define how
various economies work. An economist may use
theories for a variety of goals , depending on their
specific functions. Some theories for example focus
on why certain economic events such as inflation or
supply and demand occur.
Economic theory is divided into microeconomics
and macroeconomics.

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 Positive and Normative Economics
Positive economics
• When we are studying a problem and its related issues
which are subject to verification , like the extent of poverty
and unemployment we are referring to positive economics.
• The positive statement describes what was, what is and what
would be under the given set of circumstances.
• All these statements are capable of empirical verification .
On the basis of which degree of truth can be found.

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 Examples of Positive Economics :
• “Government funded healthcare surges public
expenditures.”
The statement is based on facts and has a
considerable value judgment involve in it. Its
credibility can be proven or disproven through a
study of the government’s involvement in
healthcare.

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 Normative Economics
• When we are offering suggestions to solve the problem ( which are
not subject to verification , like for e.g. the suggestion of reservation
in jobs to solve the problem of poverty ) , we are referring to
normative economics.
• Normative statements describe what ought to be . Its objective is to
determine norms or aims.
• There are opinions relating to right or wrong of a particular policy
matter and are always a matter of debate.
• Focuses on the value of economic fairness or what the economy
should be .

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 Example of Normative Economics
“The government should provide basic healthcare
to all citizens.”
The statement is value based rooted in personal
perspective and satisfy the requirement of what
should be.

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The problem of selection
arises because the supply of
factors of production (land,
labor, capital and enterprises )
is scarce or limited ) .

Managerial economics helps management in

making right decisions and planning for the
future under the condition of uncertainty.

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 Purpose of Managerial Economics
“The purpose of managerial
economics is to show how
economic analysis can be used
in formulating business
policies.” (Joel Dean)

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 How is Managerial Economics Useful ?
• Evaluating Choice Alternatives –identify ways to efficiently
achieve goals. Specify pricing and production strategies .
• Spell out production and marketing rules to maximize profits .
• Making the best decision – Managerial Economics helps meet
management objectives efficiently – it shows the logic of
consumer and government decision.
• To enable the manager to become a more competent model
builder.
• Provides most of the concepts that are needed for the analysis
of business problems.

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 Characteristics of Managerial Economics
• Microeconomics in nature . The problem of a particular
firm is studied in it and not the whole economy.
• Theory of Firm or Economics of Firm. All the economic
theories , concepts and economic models known as the
“Theory of Firm” or “ Economics of Firm” are studied in
Managerial Economics.
• Importance of Macroeconomics too. Macroeconomics
helps to understand the overall environment in which a
firm operates its activities .

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 Characteristics of Managerial Economics
• Applied Approach. Managerial economist analyses good or
bad efforts of various decisions on the firm. So ME is not a
theoretical subject but a subject of practical utility.
• Perspective nature. It indicates what should be done and what
not.
• Decision making at managerial level. ME is a practical
subject and its main objective and function is to help the
management in formulating suitable business policies.
• Coordinating Nature. ME provides the business managers
practical and theoretical solutions of their business problems.

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 Characteristics of Managerial Economics
• Both Science and Art . ME is used as a systematic
knowledge, therefore, it is a science. It provides
methods to reach the most beneficial decision to the
business requiring various skills hence, it is an art
too.
• As a complementary subject. In ME , helps are
sought from various disciplines like statistics,
mathematics , operation research in order to
understand the business situation and arrive at
solution by using tools provided by these disciplines.
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 Role of a Managerial Economist
• He is an economic adviser to a firm.
• He does not only study economic trends at macro
level but also interpret their relevance to a
particular industry.
• Tasked to make specific decisions.
• To use readily available information in outside
environment to make decisions that will further the
goals of the organization.

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 Role of a Managerial Economist
• To make reasonable profit on capital used by the
organization. His main obligation is to assist the
management in earning reasonable profits on capital
invested by the firm.
• Successful forecasting. Economist must aim at
lessening if not fully eliminating the risk involved in
uncertainties.
• Contact sources and specialist of information. In order
to collect quickly the relevant and valuable
information in the field.
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 Managerial Decision Making Process
Establishing Objectives

Defining the Problem

Identifying Possible Alternative

Courses of Action
Considering
Evaluating Alternative Courses Considering Financial,
Legal and
of Action and Choosing the Best Technological ,
Social
Action Infrastructural and
Constraints
Input Constraints
Implementing and Monitoring
the Decision

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 Key Takeaways

Managerial economics is that branch

of knowledge in which theories of
economic analysis are used for
solving business management
problems and determination of
business policies.

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 Managerial Economics serves as a bridge
between Economics and Business Management
Economic
Theory and Managerial
Concept( dem Decision Issues
and, supply, Quantitative
cost, Approach
competition , ( mathematical
Managerial
market economics
Economics
/Econometrics
( using both economic
theory / concepts and
quantitative approach
to managerial decision
making
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 RATIONALE OF THE FIRM
 Objective of the Firm
a. Maximize Profit
Profit = Revenue –Cost
b. Maximize Revenue
a. Minimize Cost
b. Maximize Output
Many constraints exist that may influence the
decision making process of firms. The constraints
include : legal, financial, contractual , technological

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 Rationale of the Firm

 Decision making means choosing one of the best

alternative from several alternatives .
 Managers must evaluate the implications of alternatives
and chooses the best alternative.
 There are various areas involve in decision making :
 Marketing – maximize sales
 Production – minimize cost or maximize output
 Overall Management – maximize profit
 Decisions are based on limitations.

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 ECONOMIC CONCEPTS
• Total Revenue and Marginal Relationships
1. Revenue
a. Total Revenue ( TR) is the full amount of total sales of goods
and services. It is calculated by multiplying the total amount of
goods and services sold by the price of the goods and services .
b. Average Revenue refers to the revenue obtained by the seller
by selling the per unit commodity . It is obtained by dividing
the total revenue by total output. “The average revenue curve
shows that the price of the firm’s product is the same at each
level of output “. ( Stonier and Hague )

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 c. Marginal Revenue (MR) is the increase
in revenue that results from the sale of one
additional unit of output . In economic
theory , perfectly competitive firms
continue producing output until marginal
revenue equals marginal cost.

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