Unit:-1

MB-106: Managerial Economics

By:- Manoj Kumar Gautam
The Definition and Scope of
Managerial Economics
After studying the chapter, you should
understand:
1. the subject matter of Managerial Economics
2. the analytical approach used in Managerial Economics
3.Elucidate on the characteristics and scope of managerial
economics
4.Describe the techniques of managerial economics
Introduction
Managers in all type of organization are
confronted with two type of problem:
Decision Making
Forward planning
Managerial + Economics







Economics: Economics is primarily
concerned with analyzing and
providing answer to the various
economic problem







Management:
Planning, Organizing, leading and
Controlling the efforts of a group of
people towards some common
objective
What is Managerial Economics?
Douglas - Managerial economics is the
application of economic principles and
methodologies to the decision-making
process within the firm or organization.
Pappas & Hirschey - Managerial
economics applies economic theory and
methods to business and administrative
decision-making.
What is Managerial Economics?
Howard Davies and Pun-Lee Lam -
It is the application of economic analysis to business
problems; it has its origin in theoretical
microeconomics.
Spencer & Siegelman-
It is the integration of economic theory & Business
practice for the purpose of facilitating decision making
& forward planmning by Management
These Definitions Cover a Number of
Different Approaches
1. Analysis based on the theory of the
firm
2. Analysis based upon management
sciences
3. Analysis based upon industrial
economics



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Managerial economics is thereby a
study of application of managerial
skills in economics. It helps in
anticipating, determining and
resolving potential problems or
obstacles.
These problems may pertain to costs,
prices, forecasting future market,
human resource management, profits
and so on.

Basic Nature of Economic
Positive Economics:-
Derives useful theories with testable
propositions about WHAT IS.
Normative Economics:-
Provides the basis for value judgements on
economic outcomes.WHAT SHOULD BE
Scope:
Demand Analysis and forecasting
Resource Allocation
Pricing
Cost Analysis
Competitive analysis
Strategic Planning

Scope of managerial economics
The scope of managerial economics
includes following subjects:
1) Theory of Demand
2) Theory of Production
3)Theory of Exchange or Price Theory
4) Theory of Profit
5) Theory of Capital and Investment
6) Environmental Issues

CHARACTERISTICS OF MANAGERIAL
ECONOMICS

1. Microeconomics
2. Normative economics
3. Pragmatic(Applied)
4. Uses theory of firm
5. Takes the help of macroeconomics
6. Aims at helping the management
7. A scientific art
8. Prescriptive rather than descriptive

1. Microeconomics:
It studies the problems and
principles of an individual
business firm or an individual
industry. It aids the
management in forecasting and
evaluating the trends of the
market.

2. Normative economics:

It is concerned with varied corrective
measures that a management
undertakes under various
circumstances. It deals with goal
determination, goal development and
achievement of these goals. Future
planning, policy-making, decision-
making and optimal utilization of
available resources, come under the
banner of managerial economics.

3. Pragmatic:
Managerial economics is
pragmatic. However, in managerial
economics, managerial issues are
resolved daily and difficult issues
of economic theory are kept at bay.

4. Uses theory of firm:
Managerial economics employs
economic concepts and principles,
which are known as the theory of
Firm or 'Economics of the Firm'.
Thus, its scope is narrower than
that of pure economic theory.

5. Takes the help of macroeconomics:

Knowledge of macroeconomic
issues such as business cycles,
taxation policies, industrial policy
of the government, price and
distribution policies, wage policies
and antimonopoly policies and so
on, is integral to the successful
functioning of a business
enterprise

6. Aims at helping the
management:
Managerial economics aims
at supporting the
management in taking
corrective decisions and
charting plans and policies
for future.

7. A scientific art:

It is also called a scientific art
because it helps the
management in the best and
efficient utilization of scarce
economic resources. It
considers production costs,
demand, price, profit, risk etc.

8. Prescriptive rather than descriptive:

Managerial economics is a
normative and applied discipline. It
suggests the application of
economic principles with regard to
policy formulation, decision-
making and future planning. It not
only describes the goals of an
organization but also prescribes the
means of achieving these goals.

Importance of managerial economics

1.Accommodating traditional theoretical
concepts to the actual business
behavior and conditions
2.Estimating economic relationships
3.Predicting relevant economic quantities
4.Understanding significant external
forces:
External factors
Internal factors:


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5. Basis of business policies
6 Analysis of Business Problem
7 Helpful in Decision Making
8 Reducing Risk & Uncertainty

Techniques of managerial economics:

The theory of the firm, which elucidates
how businesses make a variety of
decisions
The theory of consumer behavior, which
describes decision making by consumers

The theory of market structure and pricing,
which opens a window into the structure
and characteristics of different market
forms under which business firms operate

Business Decisions or Decision- Making
in Business
The thought process of selecting a
logical choice from the available
options.
For effective decision making, a
person must be able to forecast
the outcome of each option as
well, and based on all these items,
determine which option is the best
for that particular situation.


Features of Decision - Making
Goal Oriented
Various Alternatives
Freedom to Choose
Judgmental and Emotional
Continuous Process
Trewatha & Newport defines
decision making process as
follows:,
Decision-making involves the
selection of a course of action
from among two or more
possible alternatives in order to
arrive at a solution for a given
problem.
Types of Business Decisions
Production Decisions
Personnel Decisions
Financial Decisions
Marketing Decisions
Steps involved in Decision-Making
process
Defining / Identifying the managerial
problem,
Analyzing the problem,
Developing alternative solutions,
Selecting the best solution out of the
available alternatives,
Converting the decision into action,
and
Ensuring feedback for follow-up.



Role of a Managerial Economist in
Business Decisions
Task of making Specific decisions
by managers
Production scheduling
Demand forecasting
Market research
Economic Analysis of the industry




Cont

Investment appraisal
Security management analysis
Advice on Foreign exchange
management
Advice on trade
Pricing and the related decision
and
Analyzing and Forecasting
environmental factor

Principles of Managerial Economics
1.Incremental Principle:-This principle states
that a decision is said to be rational & sound if
given the firms objective of profit
maximisation, It leads to increase in profit,
Which in either of two Scenarios-
a. If total revenue increases more than total
cost
b. If total revenue declines less than total
cost


Equi Marginal principle:-It states that a
consumer will reach the stage of equilibrium
when the marginal utilities of various commodity
he consumes are equal.
The Law of Equi Marginal Utility:- According
to the modern Economist, This law has been
formulated in form of law of proportional
marginal utility. It states that the consumer will
spend his money income on different goods in
such a way that the marginal utility of each good
is proportional to its price.
Opportunity cost principle:- it is one of
the important & fundamental concept in
economics.
1. opportunity cost is the minimum price
that would be necessary to retain a factor
price in its given use. It is also defined as
cost of sacrificed alternatives.
2. By opportunity cost of a decision is
meant the sacrifice of alternatives required
by that decision.
Time perspective Principle:- According
to this principle, a manager should give
due emphasis, both to short term & 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 other are
variable. The production can be increased
by increasing quantity of variable factor of
production.
Long term is a time period in which all
factors of productions can become
variable. Entry & exit of sellers firms can
take place easily.
Discounting Principle:- According to this
principle, if a decision affects costs & revenues
in long run, all those costs & revenues must be
discounted to the present values before valid
comparison of alternatives is possible.
Discounting can be defined as a process used
to transform future rupees into an equivalent
number of present rupees.
this is essential because a rupee worth of
money ata future date is not worth a rupee
today. Money actually has a time value.
For instance- Rs 100 Invested today @ 10% is
equivalent to Rs 110 next year.
Economic Growth &
Development
Economic Growth:
Economic Growth is an
increase in aggregate output of
real goods and services over a
period of time


Economic Development: is a
broader term and includes
besides economic growth,
qualitative change in
technical, structural and
institutional arrangement by
which higher output is made
possible and distributed.