1.

MANAGERIAL
ECONOMICS
Meaning, Scope and
Objectives
 The BIG Picture
Income spent Revenue earned
Product R
Market e
Goods demand v
Goods supplied
e
n
Households u Firms
e

Inputs supplied Inputs demand

Factor
Income earned Market Factor costs
Managerial and business
economics
 The terms mostly used interchangeably
 Lately, the term managerial economics has become
more popular and is displacing the other term
 With modifications the principles of managerial
economics can be applied to the management of
non-business, non-profit organizations like schools,
hospitals, government organizations
 Business economics was focused primarily to
business decision making
 Managerial economics applies to both business and
non business decision making, as well as to public
and private organizations/ institutions.
Nature of managerial
economics
 Decision making and forward planning
 Business manager’s prime function is decision making and
forward planning
 It implies selecting one of the many alternative decisions.
 Forward planning means establishing plans or future
 The question of choice arises due to scarcity of resources and
their possible alternative uses.
 Thus decision making function is one of making choices for
the most efficient use of resources or desired ends.
 Once a decision is made or a goal is set, forward planning has
to be made to achieve the targets in terms of production,
pricing, capital, raw materials, labour etc.,
 Thus decision making and forward planning go hand in hand.
Decision making and
uncertainty
 Uncertainty is the typical characteristic of decision making
 This feature not only makes decision making and forward
planning complicated
 If there was no uncertainty in future, or knowledge about
future was perfect, plans could be formulated without and
without any need for subsequent revision.
 When plan execution begins, new facts come to light
requiring alterations in past decisions and plans.
 Managers are thus engaged in continuous process of decision
making through an uncertain future
 Adjusting to uncertainty is managers main challenge.
Managerial economics
and decision making
 Economic theory is of considerable help to managers in
fulfilling the function of ‘decision-making’ in an uncertainty
frame-work.
 This is because economics deals with a number of concepts
and principles relating to profit, demand, cost, supply, pricing,
production, competition,, business cycles, national income,
etc.,
 This help is enhanced when economics is aided by disciplines
like accounting, statistics, and mathematics. The two together
aid the process of business decision making and planning
 The subject-matter of managerial economics revolves around
as to how economic analysis can be used in solving business
problems
Definition of managerial
economics
 According to McNair and Meriam, Business economics consists
of the use of economic models/modes of thought to analyze
business situations.
 Spencer and Siegelman have defined, Managerial economics
as “ the integration of economic theory with business practice
for the purpose of facilitating decision-making and forward
planning by management”
 Managerial economics may therefore be defined as the
discipline which deals with the application of economic theory
to business management.
 Managerial economic is a bridge between economics and
business management. It aims to offer optimum solutions to
business problems.
Aspects of application
1.Reconciling traditional theoretical concepts of economics in
relation to
actual business behavior and conditions. For instance, firms may
not always aim at profit maximization.
2. Managerial economics attempts to reconcile accounting
concepts with the economic concepts
3. Estimation of economic relationships like various types of
elasticity's of demand and supply, cost output relationships,
etc. These relationships are used for forecasting purposes.,
4. Predicting relevant economic quantities, for example, profit,
demand, production, costs, pricing, capital etc. both in
numerical terms and with probabilities
Continued
5. Formulating business policies on the basis of
economic data and decision making processes.
Understanding significant external forces constituting
the environment in which the business is operating
and to which it must adjust, for example business
cycles, fluctuations in national income and
government policies
In short managerial economics shows how to apply
economic concepts and theories to business
decision making and planning with the help of real
world examples and case studies. It breaths life
into abstract concepts of economics.
Chief characteristics
 Managerial economics is micro-economic in
character
 Uses broadly theory of the firm concepts
 Also seeks to apply profit theory which
forms part of distribution theories
 Is pragmatic as it avoids difficult abstract
issues of economic theory.
 But involves dealing with real life
complications of business world
Chief characteristics
continued
 Belongs to normative economics rather than positive
economics. It is prescriptive rather than descriptive. It
involves judgement as to what is good/bad for business.
Managerial economics deals with which decision needs to be
made on the basis of its merits and demerits. Economic
theory does not go into judging decisions. Managerial
economics tells what the aims and objectives of a firm should
be. Then it tells how best these can be achieved
 Managerial economics is therefore described as ‘normative
micro-economics of the firm’
 Macro-economics is also useful to managerial economics as it
provides an intelligent understanding of the environment in
which the business must operate.
Scope of managerial
economics
 Demand analysis and forecasting
 Cost analysis
 Production and supply analysis
 Pricing decisions, policies nd practices
 Profit management, and Capital
management