INTRODUCTION TO MANAGERIAL ECONOMICS

PROF. V. R . KISHORE KUMAR, M.A(Q.E.)(MPhil.)

INDEX
Introduction Definition
of Economics and Managerial Economics Scope of Managerial Economics Basic Econom
ic Problems The Firm Role of a Managerial Economist Decision making areas Steps
in decision making References
INTRODUCTION
Emergence of managerial economics as a separate curse of management studies can
be attributed to at least three factors b) Growing complexity of business decisi
on making process due to changing market conditions and business environment c)
The increasing use of economic logic, conceptual theories and tools of economic
analysis in the process of business decision making process d) Rapid increase in
demand for professionally trained managerial manpower
DFINITIONS OF ECONOMICS AND MANAGERIAL ECONOMICS
ECONOMICS: Economics is a social science . Its basic function is to study how pe
ople – individual house holds, firms and nations maximizing their gains from their
limited resources and opportunities.

In economic terminology it is called as “maximizing behaviour” or more approximately

“optimizing behaviour” . Optimization means selecting best out of available resourc
es with the objective of maximizing gains from given resources.
 Economics
is thus a social science, which studies
human behaviour in relation to optimizing allocation of available resources to a
chieve the given goals. Eg : individual household behaviour, firm, industry and
nation Economics is also a study of choice-making behaviour of the people.
The origin of the subject could be traced from the works of the Greek philosophe
r Aristotle who confined the study of economics to household management and acqu
iring, guarding and making proper use of wealth. The term economics is derived f
rom two Greek words “OIKOS”(a house) and “NEMEIN”(to manage). Prof. Samuleson remarks ec
onomics as “the oldest of arts and newest of science, indeed the queen of the soci
al science.
Definitions of Economics:
Wealth Definition- Adam Smith, J.B.Say, J.S.Mill etc.(Classical definition) Welf
are Definition- Marshall, A.C.Pigue etc.(Neoclassical definition) Scarcity defin
ition- Robbins Growth Definition- Paul A Samuelson Moderndefinition
Managerial Economics
Managerial economics can be broadly defined as the study of economic theories, l
ogic and tools of economic analysis that are used in the process of decision mak
ing. Economic theories and techniques of economic analysis are applied to analyz
e business problems, evaluate business options and opportunities with a view to
arriving at an appropriate business decision.
Douglas : Managerial economics is concerned with the application of economic pri
nciples and methodologies to the decision making process within the firm or orga
nization. It seeks to establish rules and principles to facilitate the attainmen
t of the desired economic goals of the management.
Mansfield : He defines that managerial economics is concerned with the applicati
on of economic concepts and economic tools to the problems of formulating ration
al decision making. Spencer and Seigleman : It is the integration of economic th
eory with business practice for the purpose of facilitating decision making and
forward planning by management
Economic Theory and Managerial Theory
Economic Theory 1. 2. It deals with the body principles 1. Managerial Theory It
deals with the application of certain principles to solve the problem of a firm
It has only micro characteristics It deals with the study of only profit theorie
s In managerial theory assumptions disappear due to practical situations It stud
ies both economic and noneconomic concepts.
It has the characteristics of both micro and macro economics 2. It deals with a
study of individual 3. firm and individual consumer It based on certain assumpti
ons 4. It studies economic aspects of the problem 5.
3.
4. 5.
Scope of Managerial Economics
Economics has two major branches 1. Micro Economics 2. Macro Economics The term
Micro means small and Macro means big.Both are applied to business directly or i
ndirectly. managerial economics comprises both micro and macro economic theories
. The parts of micro and macro economics that constitute managerial economics de
pend on the purpose of analysis.
The scope of M.E. comprises all the economic concepts, theories and tools of ana
lysis which can be used for analyse the issues related to demand , production an
d cost, market structure etc., In other words managerial economics is economics
applied to analysis of business problems and decision making . Broadly it is app
lied economics
Micro-economics applied to internal issues : Operational issues are of internal
nature. Internal issues include all those problems which arise within the busine
ss organization and fall within purview and control of the management . Some of
the basic internal issues are : ØWhat to produce ØHow much to produce ØChoice of techn
ology i.e. choosing of the factor –combination ØChoice of price i.e. how to price th
e commodity ØHow to promote sales ØHow to face the price competition
ØHow to decide on new investments ØHow to manage capital and profit ØHow to manage inv
entory i.e. stock of both finished goods and raw material Most of the micro econ
omic problems deals with most of these questions. ØThe Law Demand ØThe Theory of Pro
duction ØAnalysis of Market Structure and Pricing Theory
ØProfit analysis and management It guide firms in the measurement and management o
f profit , in making new allowances for the risk premium, in calculating the pur
e return on capital and pure profit and also for future planning. ØTheory of Capit
al and Investment Decisions Knowledge of capital theory can contribute a great d
eal in investment-decision making, choice of projects, maintaining the capital,
capital budjeting etc.
Macro-economics deals with external issues : üThe type of economic system in the c
ountry üGeneral trends in N.I., employment, prices, savings and investments üStructu
ral change in the working financial institutions viz., banks, insurance companie
s etc üMagnitude of and trends in foreign trade üTrends in labour supply and strengt
h of capital market üGovernment’s economic policies i.e., industrial, monetary, fisc
al, price and foreign etc.
üSocial factors viz., value system of the society, property rights, customs and ha
bits etc., üPolitical environment i.e., democratic, authoritarian, socialist polit
ical systems, or state attitude towards private business man etc. These Environm
ental factors have a far-reaching bearing upon the functioning and performance o
f the firms. Therefore, decision makers have to take in to account the present a
nd future economic, political and social
Conditions in the country and give due consideration to the environmental factor
s in the process of decision making. Eg: SEZ in the Nandigram, Tata’s small car in
Singur district in West Bengal
BASIC ECONOMIC PROBLEMS
WHAT TO
PRODUCE ? PRODUCE ?
WHERE TO HOW TO
PRODUCE ? PRODUCE ?
WHOOM TO
THE FIRM

Meaning : The basic unit for obtaining production which performs crucial role of
linking product, factor and money markets. It is an administrative organization
, utilising a pool of resources. A business organization under a single manageme
nt with one or more establishments.
FIRMS,INPUTS AND OUTPUTS
Role of a managerial economist in the firm
Demand estimation and forecasting Preparation of business /sales forecasts Analy
sis of market survey to determine the nature and extent of competition Analyzing
the issues and problems of concerned industry
Assisting the business planning process of the firm Discovering new possible fie
lds of business endeavor and its cost-benefit analysis Advising on prices, inves
tment and capital budgeting policies Evaluation of capital budgeting etc.
DECISION MAKING AREAS
Business decision making is influenced not only by economic considerations, but
also by human behavioral, technological and environmental factors due to growing
public awareness. “Decision making and processing information are two important t
asks of managers” In order to make good decisions managers must be able to obtain,
process and use information.
DEMAND FORECASTING
PRODUCTION PLANNING AND COST REVENUE DECISIONS Production Function : The product
ion function is a technological relationship between output and various inputs u
sed in production viz., land, labour, capital and technology. The output depends
on the increasing function of all the factor inputs Q=f(S,L,K,T)
The following types of cost are useful in the decision areas Average, Marginal a
nd Total Costs Fixed and Variable Cost Direct and Indirect Cost Replacement and
Original Cost Opportunity and Industrial Cost Sunk Cost and Outlay Cost
STUDY OF ECONOMIC ENVIORNMENT
Economic environment is the most significant component of the business environme
nt. It affects the survival and success of a business organization.
PRICING AND RELATED DECISIONS
The Price-output decisions are taken under various market structures. The struct
ure of the market refers to the degree of competition in the market for the firm
s goods and services.
INVESTMENT DECISION Business firms invest large money in their projects. Therefo
re, capital expenditure for different project proposals compete within themselve
s for their claim on scarce resources. Generally , in business sector itself, in
dividual firms compete against access to financial resources and scares .
The investment decisions are important as vNot easily reversible vGenerally invo
lves large sums of money vHighly futuristic and future is full of uncertainty vL
ong gestation periods Thus, careful financial appraisal of each project involves
larger investments. Due to above reasons, capital decisions fall in the categor
y of investment and known as “capital budgeting decisions” made by highest level of
management.
STEPS IN DECISION MAKING
Managerial economics is concerned with decision making at the level of firm. The
se decisions have far reaching effects on the firm. Delay in taking decisions or
implementing decisions might turn in to losses. Various steps in the decision m
aking by a business firm are as fallows :
REFERENCES 3. MANAGERIAL ECONOMICS -D.N.DWIVEDI 2. BUSINESS ECONOMICS -D.D. CHAT
URVEDI S.L. GUPTA SUMITRA PAUL 11. MICRO ECONOMICS -JHON KENNADY 14.MANGERIAL EC
ONOMICS – MITHANI
THANK YOU