MANAGERIAL ECONOMICS

The study of how to direct scarce resources in the way that most efficiently
achieves a managerial goal. The managerial economics is the application of
economics theory to the problem of management

Definition Managerial economics

The integration of economics theory with business

practice for the purpose of facilitating decision
making and forward planning by management
The managerial economics helps for decision regarding business matter eg
demand forecasting of the product. Decision making is the most difficult
task In such complex situation managerial economics with the help of
statistics facilitates the manager to take decision .economics has developed
the tools to analyses market condition, demand, supply etc

Scope of managerial economics

1] Demand Analysis and Forecasting

Demand analysis helps manager to take decision regarding the demand
estimation in future market. As price, Income and other factor effect demand
of product. Price elasticity and income elasticity of demand which was
introduced by Prof.Marshall helps to future demand of product

2] Production Function
According to the Adam smith resources are scarce and have alternative uses.
All four factor of production should combine in such way that production
should be maximum and cost should be minimum. Firms are forced to do
because of cut throat competition in today’s world.

3] Cost Analysis
The success of firm depends upon its profit and profit can be increases in by
different ways eg cost reduction or reasonable costing of product in market,
which induce sales. For reasonable costing of product it important to
understand nature and types of market Eg monopoly, monopolistic market
4] Inventory Management
Managerial economics plays important role in management of inventory of
raw material, consumables etc in order to keep smooth line of working
capital. Therefore managerial economics helps with ABC analysis methods.
Managerial economics maintain production line with any hampering of line.

5] Allocation of resources
The manager always tires for optimum allocation of resources .the proper
allocation of resources helps in cost reduction and with rises in present factor
of production new alternatives for production is develop.

6] Pricing system
The one of the important function to be carried out by manager is pricing of
product, while pricing product the cost of production should be taken into
consideration .Even some factor such as average cost, average revenue, BEP
point, elasticity of demand, competition are taken into consideration.

7] Capital budgeting
Investment theory is used to examine a firm's capital purchasing decisions.
Capital is scare and has some value in market .decision regarding capital
need to in rational way by making budget.
 SCOPE OF MANAGERIAL ECONOMICS

Demand
Analysis and
Forecasting

capital
Production
budgeting
Function

Managerial
economics
Pricing
system Cost Analysis

Inventory Allocation of
Management resources
 ECONOMIC MODEL

An economic Model is a mathematical or logical statement of economic

theory. It is a method of analysis, which presents an oversimplification of
real world. In an economic Model, when an economist, abstracts from the
real world, complex ___ the abstraction has a role to play in the model
building exercise. The main purpose of an economic model is to predict and
to explain behavior. An economic model of demand might be used by
management to predict the effects on demand of a downturn in per capita
income or descriptive mathematical model of demand might suggest to the
student of corporate behavior that an economic turndown will typically
result in a firm’s reducing the level of its output. Another important purpose
of economic model is to generate new ideas.

TYPES OF ECONOMIC MODEL

1. PHYSICAL MODEL:
These are sculptures, Photographs, or visual
Presentation of certain aspect. A picture can be two dimensional or three
dimensional. These are the models with which we are quite familiar but they
are not much used in economics.

2. ANALOG MODEL:
Under this model, one set of properties represents
the other set, which the system under study processes. These models are in
form of simple graphs, chart, or functions to translate a given variable into
another.

3. SYMBOLIC MODEL:
In this model, the inter-relationship are
expressed in mathematical symbols. There are several types of symbolic
models; few of them are as follows:
A. Quantitative Model:- These are based on statistical data. Ex-
regression coefficient, theory of probability etc.
B. Allocation Model:- this model is useful for, finding optimum
solution for optimizing the profit or cost minimization under given
circumstances.
C. Scheduling Model:- This model are useful for determining an
optimum sequence for performing certain operation with the view of
minimizing overall time and cost. Eg:- CPM,
D. Queuing or waiting line model. These represent the random
arrival of the customers at any point of service.
E. Inventory Model:- These model helps in optimizing the
inventory levels. The main objective is to minimize the inventory
cost such as holding and ordering cost. EG. ABC analysis and EOQ
model.
 INTRODUCTION TO ECONOMICS
Science is systematic study of any of subject matter to accuquire the
knowledge. The science which deals with human behavior is called as social
science .the economics us the branch of social science it is treated as queen
of social science. Adam smith called economics as science of wealth.
POSITIVE APPROACH
Positive approach of economics that study concerns the description and
explanation of economic phenomena. It focuses on facts and cause-and-
effect relationship between two or more variables of economics through
application of economic theory ". The distinction was exposited by John
Neville Keynes (1891) and elaborated by Milton Friedman in an influential
1953

• Positive approach means study of subject matter as they are

• Physics and chemistry are positive science

History is positive because we cannot change what happened in past .in

positive approach is exact

NORMATIVE APPROACH
• Normative approach study the subject matter as they ought to be
• Ethics and moral science is normative approach

Normative economics deals heavily in value judgments and theoretical

scenarios. Normative economics is a valuable way to establish goals and
generate new ideas, but it is not compulsory that it should not be used as
a basis for policy decisions. many economist feels that economics should
be consider as normative because it provide guideline to finance minister
regarding desirable result.

An example of a normative economic statement would be, “We should

cut taxes in half to increase disposable income levels”

Economics is has both positive and normative approach

The study of economics is divided by modern economists into two part
such micro economics and macro economics
 MICRO ECONOMICS
Definition of micro economics

Micro economics is the study of particular firm, particular household

individual price, individual wage, and individual income, and individual
industry, particular commodity
By prof.k.boulding

Micro means a small part the economics which study demand and supply
for individual, firm in market at particular price can be treated as MICRO
ECONOMICS.
It also explain market mechanism produced in economy the theory helps
to understand complicated business economics by constructing simplified
models of behavior. Microeconomics examines how these decisions and
behaviors affect the supply and demand for goods and services Micro
economics basically deals with individual decision-making. The study of
micro economics helps in determination of price in different market
structure One of the goals of microeconomics is to analyze market
mechanisms that establish relative prices amongst goods and services and
allocation of limited resources amongst many alternative uses. micro
economics teaches the art of economising
 MACRO ECONOMICS
Definition of Macro economics

“Macro economics deals with economics affairs in the large. it concerns

with the overall dimensions of economic life”
By prof Ackley
Macro economics is the study of aggregates. It explains the determination
of aggregate output which is related to employment, income generation.
Macro analysis ignores individual’s .macro economics plays important
role in the formation of economics policies at national level, price
stability, full employment, eradication of poverty exchange rate are
objectives of macro economics .for achieving these objectives
formulation of monetary policy, fiscal policy, industrial policy, export-
import policy is important. It considers total demand of capital goods and
consumer goods.

Scope of macro
economics

Theory of general
Theory of income Theory of
price level and
&employment economic growth
inflation

Theory of
Theory of
consumption
investment
function

Scope of business
cycle
 OPTIMIZATION

According to economist resource are scare and each resource has

alternate use. Production of any product largely depends upon the factor
of production or inputs there mainly six factor of production

• Raw materials
• Machinery
• Labour services
• Capital goods
• Land
• Entrepreneur

In short run some factor of production are fixed and some are variable
where as in long run all factor including labour are variable. Means
Factor of production can be limiting factor in short run and "long-run",
all of these factors of production can be adjusted by management

Optimization means fully utilization of factor of production for getting

maximum output with available technology. If output is increase without
changing inputs, or in other words, the amount of "friction" or "waste" is
reduced. The optimization of rescores can be done by Specialization,
division of labour which increases the productivity of labour
specialization means giving the work according to skill of labour

Example

A labour is capable of doing the job on any specific machine. Company

allotted A a job of material handling and another person is doing
machine work which can be done A. then there is under utilization of
resource.
 STATIC AND DYNAMIC ECONOMY: THE
INTRODUCTION
It is essential and important to differentiate between static and dynamic
economic analysis. It was the classical economist J S Mill, who for the first
time used this concept namely static and dynamic economic analysis. The
term static and dynamic is entirely different from the concept of natural
science. In natural science static is assumed as unmovable or is at rest. The
term static not suppose to mean complete absence of movement in
economics. On the contrary, the word static in economics, means a
movement in any single direction, specific in time and extent. In static, there
is no bumps and depression in movement. All static economies are based on
the assumption of such a stationary state of the economy. In static economy,
social, economical, technological, conditions are constant, there is no
innovation in economy.

On the contrary, continuous changes are the characteristics of dynamic

economy. Horrod, states that continuous change in rate of production is the
main feature of dynamic economy. If there is a single change, then it is
referred as, ‘static economy’. In dynamic economy every factor is variable.
every economy is dynamic economy. According to J.B clark profit is reward
of firm it occurs due to dynamic nature in economy. factor such as
technology, production, government laws are subject to change.
 MARGINAL ANALYSIS
Since resources are scarce and we cannot have everything that we want,
tough choices must be made. The concept of opportunity cost reminds us
that every time we make a choice, something else must be given up.
Economics provides us with a set of tools that can help us to make better
choices. Often times, the best decision is made by weighing the marginal
benefits against the marginal costs. All managerial concepts are incremental
concept but all incremental concept are not managerial concepts

Marginal Costs
Marginal Costs are the additional costs imposed when one more unit is
produced. If the cost of making 9 pieces of samosa is RS.90 and the cost of
making 10 pieces is RS.110, the marginal cost of producing the tenth piece
of samosa is RS.20. The table below illustrates the relationship between
production, total costs, and marginal costs. Notice that total costs always rise
as production increases even though marginal costs may not rise.

Quantity Total Cost Marginal Cost

0 0 --
1 5 5
2 10 5
3 17 7
4 25 8
5 34 9
6 44 10
7 58 14
8 73 15
9 90 17
10 110 20
Marginal costs tend to rise as production increases. One explanation for this
is that when a firm grows very large, it becomes more and more difficult to
manage the organization and costs rise. Another possibility is that producing
more and more of a particular product becomes more difficult due to
technology or resource limitations. When trying to clean up the air, for
example, the first efforts are relatively inexpensive. A law can mandate, for
example, that the dirtiest cars be taken off the road. But as one tries to make
the air cleaner and cleaner, more expensive technology is needed. Therefore,
marginal costs rise. The rise in Marginal Costs is shown in the chart above.
Marginal Benefits
Marginal Benefits are the additional benefits received when one more unit is
produced. Benefits can be expressed in terms of units of utility or
satisfaction, or rupees. The table below charts the marginal and total benefits
from consuming pieces of samosa. The utility units are expressed in rupees
terms.
Quantity Total Benefits Marginal Benefits
0 0 --
1 30 30
2 55 25
3 75 20
4 90 15
5 103 13
6 113 10
7 121 8
8 126 5
9 130 4
10 132 2

Marginal Benefits tend to fall as consumption of a good or service increases.

Notice that the marginal benefit from the second piece of samosa is 25 units,
but the marginal benefit of the tenth piece is only 2 units with each
additional piece, the added benefits to the person diminish.
Generally speaking, the marginal benefits curve slopes downward because
we tend to like variety and too much of the same thing gets very old. The
chart of total and marginal benefits above demonstrates this concept.

INTERSECTION OF MARGINAL COST AND MARGINAL BENEFIT

Equating marginal cost and marginal benefit in our samosa example occurs
where the MB and MC curves intersect. This occurs at a quantity of six
pieces of samosa.

30
25
20 marginal cost
marginal benefit
15
10
5
0
1 2 3 4 5 6 7 8 9 10
nos of sam osa consum e

Always the rational consumer tries to equate the marginal cost with
marginal benefit that’s the reasons when consumer eats 6th samosa he
stops consuming because on consumption of 7th samosa he will not get
benefit more than price or marginal cost of product
ASSIGNMENT OF ECONOMICS

SUBMITTED
BY
MUKESH A DESHMUKH
MBA PART -I

K.R.S.COLLEGE OF MANAGEMENT
ANJENERI,NASHIK
ACADEMIC YEAR 2008-2009

ON
29 SEPTMBER 2008
 QUESTION

1] What managerial economics and what is scope of managerial

economics?

2] Write short notes on

 Economic model
 Positive approach and normative approach
 Micro economics and Macro economics
 optimization
 static and dynamic economy
 marginal analysis