Created By:

Archana
RBMI

Definitions
Managerial economics is an offshoot of two

disciplines economics and management

Adam Smith economics is the subject which
studies as to, how the wealth is produced and
consumed as the wealth is the main objective
and purpose of every human activity
He considered economics as the study of
nature and uses of national wealth

Definitions
Dr Alfred Marshall Economics is a study of

mans actions in the ordinary business of life:

it enquires how he gets his income and how
he uses it
He says, the main aim of economics is to
promote Human Welfare and not wealth

Promote Human Welfare than wealth

Meaning Of Economics
Economics can be called as social science dealing

with economics problem and mans economic

behavior.
It deals with economic behavior of man in society in
respect of consumption, production; distribution etc.
economics can be called as an unending science.
Economic behavior is related to choice by
individuals and others.
Individuals and others have to decide how to
allocate scarce resources in the most effective
ways.
Economics provide optimum utilization of scarce
resources to achieve the desired result. It provides
the basis for decision making.

management
Management is the art of getting the work

done through and with the people

It entails the co-ordination of human efforts
and
material
resources
towards
the
achievement of organizational objectives

Managerial Economics
Edurin Mansfield Managerial Economics is

concerned with the application of economic

concepts and economic analysis to the
problem of formulating rational managerial
decisions
Spencer
and Siegel man Business
economics is the integration of economics
theory with business practice for the purpose
of facilitating decision-making and forward
planning for management

Introduction
Managerial

Economics is economics
applied in decision-making.
Decision making is the process to select a
particular course of action from among a
number of alternatives. It is concerned
with those aspects of economics and its
tools of analysis which are used in the
process of decision making of business
enterprise.
It is the study of managing maximum
gains out of scarce resources.

Definition
Managerial economics is concerned with
the application of economic principles and
methodologies to the decision process with
in the organization. It seeks to establish
rules
and principles to facilitate the
attainment of the desired economic goals of
management.
-- By Edwin Mansfield

Diagrammatic Presentation

Economic Theory
and Methodology

Business Management
Decision Problems

Managerial Economics:
Application of Economics
to solving business

Optimal solution to
business problems

Key Points Of
Definition
Decision-Making
Economic Methodology
Economic goals of firm

Decision-making - It is the process of

selecting best out of alternative opportunities

open to the firm.
Economic Methodology - It is a relation

between ideas , thoughts , intuitions &

experience with economic tools & techniques .
Economic goals of firm - In the nutshell, It

is making maximum gains out of available

resources.

CHARACTERISTICS OF
MANAGERIAL
Microeconomics
Normative economics:
ECONOMICS
Pragmatic

Prescriptive rather than descriptive

Takes the help of macroeconomics

DIFFERENCE BETWEEN
ECONOMICS AND
MANAGERIAL ECONOMICS
ECONOMICS TELLS US ABOUT BODY OF

PRINCIPLE WHILE THE MANAGERIAL

ECONOMICS TELLS DEALS WITH THE
APPLICATION OF ECONOMIC PRINCIPLES TO
THE PROBLEM OF THE FIRM

DIFFERENCE BETWEEN
ECONOMICS
AND
ECONOMICS HAS BOTH CHARACTERSTICS OF
MANAGERIAL
MICRO AND MACRO ECONOMICS
MANAGERIAL ECONOMICS HAS MAJOR

CHARACTERSTICS OF MICRO

DIFFERNCE BETWEEN
ECONOMICS
AND
MICRO ECONOMICS AS A PART OF ECONOMICS
MANAGERIAL
ECONOMICS
DEALS WITH INDIVIDUALS
AND FIRMS
WHILE MANAGERIAL ECONOMICS DEALS ONLY

WITH FIRMS AND NOT WITH INDIVIDUALS

DIFFERENCE BETWEEN
ECONOMICS AND
MICRO ECONOMICS BEING PART OF ECONOMICS
MANAGERIAL
ECONOMICS
DEALS WITH DISRIBUTION
THEORY OF
RENT,INTEREST,PROFIT.WAGES
WHILE MANAGERIAL ECONOMICS DEALS ONLY
IN PROFITS.

Scope Of Managerial
Economics
Micro Economics

when something is concerned with

individual (person, firm or household)
Macro Economics

something related to the environment

as a whole

Micro Economics
It has been defined as that branch where the unit

of study is an individual, firm or household.

It studies how individual make their choices
about,
what to produce?
How to produce?
For whom to produce?, and
What price to charge?

It is also known as the price theory.

It is the main source of concepts and analytical

tools for managerial decision making

Micro economic
theories
Theory of production;
Theory of price determination;
Theory of profit;
Theory of demand.

Macro Economics
It studies the economics as a whole.
It is aggregative in character and takes the entire

economic as a unit of study.

Macro economics helps in the area of forecasting.
It
includes
National
Income,
aggregate
consumption, investments, employment etc.
It facilitates government in taking policy decisions
such as,
How much to spend on health?
How much to spend on services?
How much should go in to providing social security benefits?

Macro economic
theories
Environment or external issues;
Theories of government policies;
Theory of capital and Investment.

Nature of managerial
economics
It is a science.
It is an art.
It is a micro economics.
It is a normative science.

Role of Managerial
Economist
Making decisions and processing information
are the two primary tasks of managers. The
task of organizing and processing information
and then making an intelligent decision based
upon this information and the basic theory
can take two general form:
Specific decision
General task

Specific decision
Production scheduling
Demand forecasting,
Market research,
Economic analysis of industry,
Investment appraisal,
Advice on trade
Security management analysis,
Pricing and related decision,
Analyzing and forecasting environmental factors.

General task
External factors
General economic
conditions
Demand for the
product
Input cost of the firm.
Market conditions.
Firms share in the
market.
Economic policies.

Internal factors
Determination of
pricing policies.
Decision of expansion
of business activities .
Determination of level
of efficiency and
operation.
Determination of
wages policy.

Responsibilities of Managerial
Economist
To measure the increase in earning capacity of

the firm.
To make successful forecasting.
To contact the sources of Economic information
and Experts.
To keep the management informed of all the
possible economic trends.
To achieve economic respectable status in the
firm.
To perform functions sincerely.

Decision Making
Decision making is the central objective of Managerial

Economics
Decision making may be defined as the process of
selecting the suitable action from among several
alternative courses of action
The problem of decision making arises whenever a
number of alternatives are available. Such as,
What should be the price of the product?
What should be the size of the plant to be installed?
How many workers should be employed?
What kind of training should be imparted to them?
What is the optimal level of inventories of finished
products, raw material, spare parts, etc.?

DEMAND FORECASTING

PRODUCTION PLANNING AND COST

REVENUE DECISIONS
Production Function :
The production function is a technological
relationship between output and various inputs used
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 and 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 environment. 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 structure of the market refers to the degree
of competition in the market for the firms goods and
services.

INVESTMENT DECISION
Forward planning involves investment
problems. These are problems of allocating
scarce resources over time.
For example, investing in new
plants, how much to invest, sources of funds,
etc..

STEPS IN DECISION MAKING

Various steps in the decision making by a business firm

are as fallows :

Why Problems of Decision Making

Arises?

Due to the scarcity of resources.

We have unlimited wants and the means to satisfy

those wants are limited,

With the satisfaction of one want, another arises,
and here arises the problem of decision making.
While performing his function manager has to
take a lot of decisions in conformity with the goal
of the firm.
Most of the decisions are taken under the
condition of uncertainty, and involves risks.
The main reasons behind uncertainty and risks
are uncertain behavior of the market forces.

ME and Other Disciplines

Mathematics
Statistics
Operations Research
Management Theory
Accounting
Computers

Scope of ME
Demand analysis and Forecasting,
Production function,
Cost analysis,
Inventory Management,
Advertising,
Market structure and Pricing System,
Profit Analysis,
Resource allocation etc

Nature of ME
Concepts of Micro-Economics
Elasticity of demand
Marginal cost
Marginal revenue
Market structures and their significance in

pricing policies.
Concepts of Macro-Economics
The magnitude of investment and the level of
national income,
The level of national income and the level of
employment,
The level of consumption and the level of
national income
In ME emphasis is laid on those prepositions which
are likely to be useful to management

Importance of
managerial
economics:
Reconciling traditional
theoretical concepts to
the actual business behaviour and conditions
Estimating economic relationships
Predicting relevant economic quantities
Understanding significant external forces
Basis of business policies
Ideal from other subject
Helpful to new age manager

Factors Influencing Managerial Decision

Making
Besides

economic variables managerial

decision making is also influenced by other
significant variables, such as
Human and Behavioral Considerations
Technological Forces
Environmental Forces

Opportunity cost
Incremental principle (Cost & Revenue)
Principles of Managerial Economics
Principle of the time perspective

/Tools of Decision Making

Discounting principle
Equi-marginal principle

Opportunity cost
The opportunity cost of anything is the return

that can be had from the next best alternative

use.
A farmer who is producing wheat can also
produce potatoes with the same factors.
Therefore, the opportunity cost of a quintal of
wheat is the amount of the output of potatoes
given up.
The opportunity costs are the costs of
sacrificed alternatives.

Incremental principle
(Cost
& Revenue)
Incremental
cost - change in total cost as a
result of change in the level of output,
investment etc.
Incremental revenue- change in total
revenue resulting from a change in the level
of output, prices etc.
A manager always determines the worth of a
decision on the basis of the criterion that
IR>IC.
For Example:

Principle of the time

perspective
Decision maker must give due consideration to time
element in his decision maker exercise. General
distinction is made between short-run and long-run.
Short-run- volume of output cannot be changed by
altering the sixe of the firm and the scale of plant.
The output can be increase or decrease only by
changing the variable input.
Long-run- time period in which all factors are
variable and that the size of the firm and the scale
of plant can be changed to change the volume of
output.

Discounting principle
Time value of money
Examples:

Equi-marginal principle
According to this principle, different courses of

action should be pursued up to the point where

all the courses provide equal marginal benefit per
unit of cost. It states that a rational decisionmaker would allocate or hire his resources in such
a way that the ratio of marginal returns and
marginal costs of various uses of a given resource
or of various resources in a given use is the
same. For example, a consumer seeking
maximum utility (satisfaction) from his
consumption basket, will allocate his
consumption budget on goods and services such
that

MU1/MC = MU2 / MC2 =..= MUn / MCn

Where MU1 = marginal utility from good one,
MC1 = marginal cost of good one and so on.

Example:

Activity
1. Make a list in your own words of some of
the economic decision that
you are facing
your family has to take
your country has to take

2. Take any quality newspaper, go through it

and make notes on the following:
Micro economic
Macro economic (problems and issues you find)

3. Suppose there is a firm with a

temporary idle
capacity. An order for 5000 units comes to
managements attention. The customer is willing
to pay Rs 4/- unit or Rs.20000/- for the whole lot
but not more. The short run incremental cost
(ignoring the fixed cost) is only Rs.3/-. There fore
the contribution to overhead and profit is Rs.1/per unit (Rs.5000/- for the lot)
What long run repercussion of the order is to be
taken into account?

References
Google search engine.
Wikipedia
Scribd.com
Slideshare.com