Introduction to

managerial
economics
What is economics?
There is no universally accepted
answer to the question.
Root of the word ‘economics comes
from Greek word
‘oikonomia’( management of
household or household rules).
Economist’s dictionary of economics
defines it as “ the study of production,
distribution and consumption of
wealth in society’
• It is the study of how individuals and groups
make decisions with limited resources as to
best satisfy their wants, needs and desires.
• In short ‘it is a social science that explains
how people choose to use limited or scarce
resources in attempting to satisfy unlimited
wants’.
• It solves the dilemma of what to produce,
how to produce, and for whom to produce.
• In short, economics helps to solve the main
problems of allocation, production and
distribution.
 MANAGERIAL ECONOMICS
• Managerial economics is essentially applied
economics in the field of business management.
• It is the economics of business.
• It pertains to all economics aspects of
managerial decisions making.
• It is the integration of economic principles with
business management practices.
• Managerial economics rests on the edifice of
economics.
• A fundamental knowledge of economics and
economic theory is needed for a meaningful
analysis of business situation
• Managerial economics is fundamentally
concerned with the art of economizing
i.e. making rational choices to yield
maximum return out of minimum
resources/ making the best selection
among alternative courses of action.
Relationship with other areas/disciplines
in economics
Managerial economics provides a link between economic theory and the
decision sciences in the analysis of managerial decision making

Problems faced
by decision
makers in
management
Econom
ic Decision
theory sciences
Managerial economics
,which applies and extents
economics and the
decision sciences to solve
management problems

Solutions to
decision problems
faced by
managers
• Managerial economics provides a link between
economic theory and decision sciences .
• Traditional economic theory consists of
microeconomics ( focusing on individual
consumers, firms and industries ) and
macroeconomics (focusing on aggregate
output, income and employment)
• Managerial economics draws heavily from
economic theory, more so from microeconomics
but yet it is quite different.
• Microeconomics is largely descriptive
i.e.explains how the economy works without
indicating how it should operate.
• Whereas managerial economics is
largely prescriptive (it attempts to
establish rules and techniques to fulfill
specific goals)
• E.g. microeconomics is concerned with
the way computer manufacturers like
HCL price their product, while
managerial economics is concerned
with how they should price their
products.
Basic process of decision-making

Establish
objectives

Define the
problem

Identify possible
solutions
Consider Select the best Consider legal
input possible and other
constraints solution constraints

Implement the
decision
 Managerial economics has two important
roles
• It provides fundamental analytical tools
that can and should be used in other
areas of marketing, finance, production
etc.
• A course in managerial economics can
serve an integrating role showing how
other areas in business such as
production, finance, marketing , HR,
must be viewed as a whole in order to
fulfill the goals of the firm.
 Relationship to production management,
marketing, finance, personnel and operational
research
 Production management: Production & Operation
management ( POM ) is the management of a
organizations production system.
A production system takes inputs and converts them
into outputs.
In this area managerial economics help in making the
strategic decisions , operating decisions and control
decisions
 Marketing management: As Peter Drucker said “
Marketing is the distinguishing, unique function of the
business”
Managerial economics helps in making marketing
strategy decisions , pricing decisions, value chain
analysis, cost analysis.
 Finance management: it is the management of
the finances of a business / organizations in order
to achieve its financial objectives.
Managerial economics plays a role in helping make
financial decisions, in financial control etc.
 Personnel management: it is human resource
management which includes other related areas
of strategic human resource, planning models ,
HR-performance management etc.
All these disciplines draw heavily from the theories
of managerial economies.
 Operation research: it is a discipline of
applying advanced analytical methods
to make better economic and business
decisions, here too managerial
economics makes a significant
contribution.
 Salient features & significance of managerial
economics
o It involves an application of economic theory-
especially, microeconomic analysis to practical
problem-solving in real business life. It is
essentially applied microeconomics.
o It is an art as well as a science facilitating
better managerial discipline.
o It is concerned with the firms behavior in
optimal allocation of resources. It provides
tools to help in identifying the best course
among the alternatives and competing
activities in any productive sector whether
private or public.
 Role & responsibilities of managerial economist
 Nowadays managerial economist have become
permanent fixtures in modern business
enterprises. They are known by various names
such as company economist, economic advisors,
business economist etc.
 By and large they are operation researchers and
system analyst
 Their main task is to apply intelligently certain
quantitative and qualitative techniques to the
practical aspects and problems encountered by a
business firm. Some of the duties carried out are
• Demand estimation and forecasting
• Analysis of market to determine nature and
extent of competition
• Analyzing the issues of the problems of the
concerned industry
• Directing economic research activity
• Advising on pricing investment and budgeting
policies.
• Briefing the management on current domestic
and global issues emerging challenges and
threats
• Interpretation, analysis and reporting of
current economic issues.
• In conclusion it can be said that the
managerial economist is a thinker and he
plays the role of being both the friend
and philosopher to the business man.

References :
Managerial economics -Dr. D.M Mithani
Managerial economics - Dominick Salvatore