UNIT- I

Meaning and scope of managerial

economics - fundamental concepts -
scarcity, marginalism, opportunity cost
- discounting - risk and uncertainity -
profits - objectives - basic techniques -
derivatives - partial derivatives -
optimisation.
 Managerial Economics ME
• Managerial economics is the science of
directing scarce resources to manage cost
effectively. It consists of three branches:
competitive markets, market power, and
imperfect markets. A market consists of
buyers and sellers that communicate with
each other for voluntary exchange.
 ME
• Managerial economics is the "application of the
economic concepts and economic analysis to the
problems of formulating rational managerial
decisions".
• It is sometimes referred to as business
economics and is a branch of economics that
applies microeconomic analysis to decision
methods of businesses or other management
units.
• It bridges economic theory and economics in
practice.
 ME
• Managerial Economics can be defined as amalgamation of economic
theory with business practices so as to ease decision-making and future
planning by management. Managerial Economics assists the managers of
a firm in a rational solution of obstacles faced in the firm’s activities. It
makes use of economic theory and concepts. It helps in formulating logical
managerial decisions. The key of Managerial Economics is the micro-
economic theory of the firm. It lessens the gap between economics in
theory and economics in practice. Managerial Economics is a science
dealing with effective use of scarce resources. It guides the managers in
taking decisions relating to the firm’s customers, competitors, suppliers as
well as relating to the internal functioning of a firm. It makes use of
statistical and analytical tools to assess economic theories in solving
practical business problems.
• Study of Managerial Economics helps in enhancement of analytical skills,
assists in rational configuration as well as solution of problems.
• The use of Managerial Economics is not limited to profit-making firms and
organizations. But it can also be used to help in decision-making process of non-
profit organizations (hospitals, educational institutions, etc). It enables optimum
utilization of scarce resources in such organizations as well as helps in achieving
the goals in most efficient manner. Managerial Economics is of great help in price
analysis, production analysis, capital budgeting, risk analysis and determination of
demand.
• Managerial economics uses both Economic theory as well as Econometrics for
rational managerial decision making. Econometrics is defined as use of statistical
tools for assessing economic theories by empirically measuring relationship
between economic variables. It uses factual data for solution of economic
problems. Managerial Economics is associated with the economic theory which
constitutes “Theory of Firm”. Theory of firm states that the primary aim of the firm
is to maximize wealth. Decision making in managerial economics generally involves
establishment of firm’s objectives, identification of problems involved in
achievement of those objectives, development of various alternative solutions,
selection of best alternative and finally implementation of the decision.
 Ways in Which the Managerial
Economics relates to Managerial
Decision Making
 Managerial decision areas include:

• assessment of investible funds

• selecting business area
• choice of product
• determining optimum output
• sales promotio
 Analysis for BD
• Business Decision (BD) can be analyzed with managerial economics
techniques, but it is most commonly applied to:

• Risk analysis – various models are used to quantify risk and

asymmetric information and to employ them in decision rules to manage
risk.

• Production analysis – microeconomic techniques are used to

analyze production efficiency, optimum factor allocation, costs, economies
of scale and to estimate the firm's cost function.

• Pricing analysis – microeconomic techniques are used to analyze

various pricing decisions including transfer pricing, joint product
pricing, price discrimination, price elasticity estimations, and choosing the
optimum pricing method.

• Capital budgeting – Investment theory is used to examine a firm's capital

purchasing decisions
 Scope
• Managerial economics to a certain degree is
prescriptive in nature as it suggests course of
action to a managerial problem.
• Problems can be related to various
departments in a firm like production,
accounts, sales, etc.
• Demand decision.
• Production decision.
• Theory of exchange or price theory.
• All human economic activity.
• Managerial Economics has a more narrow
scope - it is actually solving managerial issues
using micro-economics. Wherever there are
scarce resources, managerial economics
ensures that managers make effective and
efficient decisions concerning customers,
suppliers, competitors as well as within an
organization
 Nature of Managerial Economics
• Managerial Economics is a Science
• Managerial Economics is an essential scholastic
field. It can be compared to science in a sense
that it fulfils the criteria of being a science in
following sense:
• Science is a Systematic body of Knowledge. It is
based on the methodical observation. Managerial
economics is also a science of making decisions
with regard to scarce resources with alternative
applications. It is a body of knowledge that
determines or
 Nature of ME
• Managerial Economics requires Art
• Managerial economist is required to have an art of utilising his capability, knowledge and understanding to
achieve the organizational objective. Managerial economist should have an art to put in practice his
theoretical knowledge regarding elements of economic environment.
• Managerial Economics for administration of organization
• Managerial economics helps the management in decision making. These decisions are based on the economic
rationale and are valid in the existing economic environment.
• Managerial economics is helpful in optimum resource allocation
• The resources are scarce with alternative uses. Managers need to use these limited resources optimally. Each
resource has several uses. It is manager who decides with his knowledge of economics that which one is the
preeminent use of the resource.
• Managerial Economics has components of micro economics
• Managers study and manage the internal environment of the organization and work for the profitable and
long-term functioning of the organization. This aspect refers to the micro economics study. The managerial
economics deals with the problems faced by the individual organization such as main objective of the
organization, demand for its product, price and output determination of the organization, available substitute
and complimentary goods, supply of inputs and raw material, target or prospective consumers of its products
etc.
• Managerial Economics has components of macro economics
• None of the organization works in isolation. They are affected by the external environment of the economy in
which it operates such as government policies, general price level, income and employment levels in the
economy, stage of business cycle in which economy is operating, exchange rate, balance of payment, general
expenditure, saving and investment patterns of the consumers, market conditions etc. These aspects are
related to macro economics.
• Managerial Economics is dynamic in nature
• Managerial Economics deals with human-beings (i.e. human resource, consumers, producers etc.). The nature
and attitude differs from person to person. Thus to cope up with dynamism and vitality managerial economics also
changes itself over a period of time.
•
 marginalism
• Marginalism is a theory of economics that attempts to
explain the discrepancy in the value of goods and services
by reference to their secondary, or marginal, utility. ... Thus,
while the water has greater total utility, the diamond has
greater marginal utility.
•
The concept that economic behavior can be determined by
analyzing the fluctuations in the demand for basic goods
and services. This method assists manufacturers and
businesses to determine the required levels of activity for
their services and the quantity of products that need to be
produced.
 marginalism
• DEFINITION of 'Marginalism'
• The study of marginal theories and relationships within
economics. The key focus of marginalism is how much extra
use is gained from incremental increases in the quantity of
goods created, sold, etc. and how those measures relate to
consumer choice and demand.
Marginalism covers such topics as marginal utility, marginal
gain, marginal rates of substitution, and opportunity costs,
within the context of consumers making rational choices in
a market with known prices.
•
 marginalism
• "Marginalism" describes both a method of analysis and
a theory of value in economics. According to this
theory, individuals make economic decisions on the
margin; value is determined by how much additional
utility an extra unit of a good or service provides. It
would be difficult to overstate how important this
concept is to contemporary economic understanding.
The development of marginal theory is commonly
referred to as the Marginalist Revolution and is seen as
the dividing line between classical and modern
economics.
 marginalism
• The concept of 'margin' is very popular in Economics. Economists speak
of equilibrium solutions in terms of marginal adjustment. For example,
in formal economic theory we learn that a business firm makes a
decision to produce by equating marginal revenues with marginal
costs. There are various other marginal concepts like marginal utilities
and marginal productivities. Any such concept of margin has reference
to impact of a one-unit change in the independent variable on the
dependent variable. Revenues earned or the cost incurred by a firm
depends on the volume of output produced and sold. Accordingly,
marginal revenue is the change in total revenue resulting from an one-
unit change in tile volume of output produced; it is the additional
amount of revenue earned if the firm decides to produce (n + 1) rather
than n units of output. Similarly, marginal cost refers to the cost of
producing the additional unit of output. Marginal utility is the addition
made to total satisfaction as a result of an additional unit of
consumption of an item. Marginal product is the addition made to total
product (subtraction from the product) as a result of employing an
additional (withdrawing the last factor of production.
 Profit
• a financial gain, especially the difference
between the amount earned and the amount
spent in buying, operating, or producing
something.
• A profit is an amount of money that you gain
when you are paid more for something than it
cost you to make, get, or do it.
• Profit is the positive gain remaining for a
business after all costs and expenses have
been deducted from total sales. Profit is also
referred to as the bottom line, net profit or
net earnings.
 Profit
• 1. excess of revenues over outlays and expenses in a business
enterprise over a given period of time, usually a year
• 2. the monetary gain derived from a transaction
• 3. a. income derived from property or an investment, as contrasted
with capital gains
• b. the ratio of this income to the investment or principal
• 4. economics a. the income or reward accruing to a successful
entrepreneur and held to be the motivating factor of all economic
activity in a capitalist economy
• b. (as modifier)
• the profit motive
• 5. a gain, benefit, or advantage
• verb6. to gain or cause to gain profit
 Profit
• The surplus remaining after total costs are deducted from
total revenue, and the basis on which tax is computed and
dividend is paid. It is the best known measure of success in
an enterprise.
Profit is reflected in reduction in liabilities, increase in
assets, and/or increase in owners' equity. It furnishes
resources for investing in future operations, and its absence
may result in the extinction of a company. As an indicator
of comparative performance, however, it is less valuable
than return on investment (ROI). Also called earnings, gain,
or income.
 Objectives of profit in Business
• A business is deemed successful when it earns
profits, but profit is just one objective that a
business tries to achieve; over time, other
pressing objectives that may emerge. These
objectives can include growth, responses to
environmental changes or societal
responsibilities.
 Objectives of Profit in Business

• The profit in business can be judged from the following points.

• 1. Sources of Income
• Investors invest their money in the business with the sole purpose of
earning profit, since profit is a source of income, it is therefore provides
the owners of business the mean with which they and their family
members can live a comfortable life.
• 2. Continuity of Business
• The incentive of earning profit keeps the man engaged in business
activities. A business can only grow and gain strength if it earns profit. So
earning of profit is necessary for the continuity of business.
• 3. Expansion of Business
• One of the roles of profit in business is that businessman retains and
reinvests a part of its profits in business undertaking stands on sound
footing. It can expand and diversify business not only from reinvestment
of funds but also getting loans from external sources for business.
 Objectives of Profit in Business
• 4. Reward of Risk Bearing
• Profit is the reward for bringing new products or processes to the
market. It is a reward for a risk successfully undertaken. Profit,
therefore, is a reward for the future which is uncertain.
• 5. Profit and Economic Development
• Another role of profit in business is economic development. Profit
and economic development are closely related with each other. If
the firms are not earning profit then there is no economic progress
in the country. If there is no economic development there is no
profit to the business.
• 6. Profit Acts as Measure of Efficiency
• Profit acts as an index of performance for business, if the business
firms are earning profits. It shows that the country is progressing
satisfactorily
 Objectives of Profit in Business
• A business should earn profit but not to ignore:
• The provision of quality goods at reasonable
prices to the consumers
• Payment of all due taxes to the government
treasury
• Generating and offering good remuneration to its
employees
• Provision of hygienic working conditions
• Contributing to the general welfare of the society
 I. Organic objectives

• I. Organic objectives:
• Organic objectives can also be termed as threefold objective. In order to be successful, the business organisation has to fulfill its primary objectives
i.e. to survive, to maintain growth and make profit.
• The Organic objectives of the business are classified into:
• a. Survival
• ADVERTISEMENTS:
• b. Growth
• c. Prestige
• a. Survival:
• Profit earning is regarded as a main objective of every business unit. But it is essential for the survival and growth of every business enterprise. ‘To
survive’ means, “to live longer”. Survival is the primary and fundamental objective of every business firm.
• ADVERTISEMENTS:
• The business cannot grow until and unless it survives in a competitive business world. Due to intense global competition, survival has become
extremely difficult for the organisation.
• b. Growth:
• Growth comes after survival. It is the second major business objective after survival. Growth refers to an increase in the number of activities of an
organisation. It is an important organic objective of an organisation. Business takes place through expansion and diversification. Business growth
benefits promoters, shareholders, consumers and the national economy.
• c. Prestige/Recognition:
• Prestige means goodwill or reputation arising from success or achievement. This is the third organic objective after survival and growth. Business
growth enables the firm to establish goodwill in the market.
• The business firm has to satisfy the human wants of the society. Along with profit it business wants to create a distinct image and goodwill in the
market.
 II. Economic objectives:

• Economic objectives stand at the top most in the hierarchy of business objectives. Economic objectives of business refer to the objective of earning
profit and others that include creation of customers, regular innovations and best possible use of available resources.
• ADVERTISEMENTS:
• The following economic objectives are explained in detail:
• a. Profit:
• The primary objective of every business is to earn profit. Profit is the lifeblood of business, without which no business can survive in a competitive-
market. Profit is the financial gain or excess of return over investment.
• It is the reward for bearing risk and uncertainty in the business. It is a lubricant, which keeps the wheels of business moving. Profit is essential for the
survival, growth and expansion of the business.
• b. Creating and retaining customers:
• Consumer is a king of the market. All the business activities revolve around the consumers. The success of the business depends upon its customers.
It is not only necessary to make customers but also to hold the customers.
• Competition is intensely rising. Hence to face this stiff competition, it is necessary for the businessman to come out with new concepts and products
for attracting the new customers and retaining the old one.
• c. Innovation:
• Innovation is the act of introducing something new. It means creativity i.e. to come up with new ideas, new concepts and new process changes,
which bring about improvement in products, process of production and distribution of goods.
• Innovation helps in reducing the cost by adopting better methods of production. Reduction in the cost and quality products increase the sales
thereby increasing the economic gain of the firm. Hence to survive in the competitive world, the business has to be innovative.
• d. Optimum utilisation of the scarce resources:
• Resources comprises of physical, human and capital that has to optimally utilise for making profit. The availability of these resources is usually
limited. So the firm should make best possible use of these resources, wastage of the limited resource should be avoided.
 III. Social Objectives:
• Social objective means objective relating to the society. This objective helps to shape the character of the company in the minds of the society. The obligation of any business to protect
and serve public interest is known as social responsibility of business.
• Society comprises of the consumers, employees, shareholders, creditors, financial institutions, government, etc. Business has some responsibility towards the society. Businessmen
engage themselves in research for improving the quality of products; some provide housing, transport, education and health care to their employees and their families.
• In some places businessmen provide free medical facility to poor patients. Sometimes they also sponsor games and sports at national as well as international level etc.
• a. Towards the Employees:
• Employee of a business firm contributes to the success of the business firm. They are the most important resource of the business. Every business is responsible towards their employees
in respect of wages, working conditions, etc. The interest of the employees should be taken care of. The authorities should not exploit the employees.
• b. Towards the Consumers:
• Business has some obligation towards the consumers. No business can survive without the support of customers. Now-a-days consumers have become very conscious about their rights.
They protest against the supply of inferior and harmful products.
• This has made it obligatory for the business to protect the interest of the consumers by providing quality products at the most competitive price. They should charge the price according
to the quality of the goods and services provided to the consumers. There must be regularity in supply of goods and services
• c. Towards Shareholders:
• Shareholders are the owners of the company. They provide finance by way of investment in debentures, bonds, deposits etc. They contribute capital and bear the business risks. The
primary responsibilities of business towards.
• It is the responsibility of the business to safeguard the capital of the shareholders and provide a reasonable dividend. Business and Society are interdependent. Society depends on
business for meeting its needs and welfare, whereas, Business depends on society for its existence and growth.
• d. Towards the Creditors/financial institutions
• e. Towards the Suppliers:
• Suppliers supply raw material, spare parts and equipment’s necessary for the business. It is the responsibility of the business to give regular orders for the purchase of goods, avail
reasonable credit period and pay dues in time. The business should maintain good relations with the supplier for regular supply of quality raw material.
• f. Towards the government:
• Government frame certain rules and regulations with in which the business has to act.
• These are the following responsibilities of the business towards government are:
• i. Paying taxes regularly
• ii. Conducting business in a lawful manner
• iii. Setting up business enterprise as per the government guidelines
• iv. Avoiding indulgence into monopolistic and restrictive trade practices,
• v. Avoiding indulgence into corruption and unlawful practices.
• g. Towards the environment:
• The business is also responsible towards the environment. It is the responsibility of the business to keep the environment pollution free by producing pollution free products. Business is
also responsible to conserve natural resources and wild life and hence promote the culture.
 IV. Human Objectives:

• Human objective refers to the objectives aimed at well being of the employees in the organisation. It includes
economic well-being of the employees and their psychological satisfaction.
• Hence the human objectives of the business organisation can be explained with the following points:
• a. Economic well-being of the employees:
• Employees should be given fair wages and incentives for their work done. They should also be provided with the
benefits of provident fund, pension and other amenities like medical facilities, housing facilities etc.
• b. Human Resource development:
• The organisation should undertake necessary human resource development programmes. Employees always want
to grow and prosper. Employees to grow, the firm must conduct proper training and development programmes to
improve their skills and competencies.
• c. Motivating employees:
• Employees need continuous motivation to improve their performance in their job. It is the job of the organisation
and managers to motivate their employees by providing them monetary and non-monetary incentives like bonus,
increments, promotions, job-enrichment, proper working conditions, appreciations etc. motivated employees put
efforts and are dedicated towards their job.
• d. Social and psychological satisfaction of the employees:
• This is the most important objective of the organisation towards their employees. The business should provide
social and psychological satisfaction to their employees. Employees can feel satisfied if they are put on the right
job according to their skill, talent and qualification.
• The firm should give prompt attention to the employee grievances and necessary suggestions should be provided.
Psychologically satisfied employees put best efforts in their work.
 V. National Objectives:

• The business enterprise contributes for the upliftment of the nation. Every business has an obligation towards nation to fulfill national goal: and
aspirations. The goal can be increase employment opportunities, earn foreign revenue, promote social justice etc. The following national objectives
are explained in detail:
• a. Employment opportunities:
• Public benefit is the basic national objective of a business firm. Business creates employment opportunities directly or indirectly. People can be
employed in production and distribution activities by establishing new business units, expanding markets, widening distribution channels,
transportation, insurance etc.
• b. Developing backward areas:
• Business undertakes projects in the backward region and thereby develops the backward areas of the nation. Business also helps in providing
infrastructure facilities in the backward regions of the country like transportation, banking, communication etc.
• Opening of small-scale industries in those backward areas also provide employment opportunities to the people and results into balanced regional
development.
• c. Promoting social justice:
• The term social justice indicates uniform rights and equality to all the sections of the society. Business can do justice with the society by providing
them better quality products and services at reasonable prices.
• They should not undertake any malpractices and prevent the customers from being exploited. The business should also provide equal opportunities
to all the employees to work and progress.
• d. Raising standard of living:
• Business can raise the standard of living of the people of the country by making quality goods and services available at reasonable prices. Consuming
quality products enhances the standard of living of the people.
• e. Contributes revenue to the government:
• Business helps in earning more foreign exchange to the government by undertaking export activities. The revenue of the government also increases
by payment of taxes by the business entities, which can further be used for the development of the nation.
 Basic techniques
• Strategies to increase sales revenue
• Increase productivity of your staff - recognise and reward staff
contributions with staff performance reviews, and teach them sales skills
and how to upsell products so customers make multiple purchases at one
time
• Develop new product lines - survey your customers about new products
• Find new customers - new customers can help grow your business
• Find new markets - use market research to determine if you could expand
your business into new areas
• Customer service - improve your customer service and develop a staff
training program
• Increase your prices - check if you have priced your goods and services
correctly and if you could increase prices without reducing sales
• Price discounts - consider price discounts and promotions to increase your
customer base (e.g. 2-for-1 deals or happy hour)
• Retail displays - use effective retail displays to increase your sales
 Basic techniques
• Strategies to decrease costs
• Decrease inventory - stock control is a good way to streamline your
business
• Decrease direct costs - make sure you have the right suppliers for
your business and negotiate for better prices or discounts for
buying in bulk
• Decrease indirect costs - for example, try to minimise waste and
errors in your business by training staff, or reduce marketing costs
by using low-cost marketing techniques
• Decrease overheads - for example, save energy wherever possible
or try find a cheaper energy supply company
• Benchmark key financials - benchmarking your business helps you
compare your costs (like rent and utilities etc.) to similar businesses
in your industry to see if you are paying too much
 Basic techniques
• Prioritise your strategies
• Once you have chosen strategies to make your business more
profitable, you should prioritise them in order of importance. It's a
good idea to write down your goals and the corresponding
strategies to achieve them, and also how you plan to implement
your strategies.
• Focus on your more profitable items
• Your products or services with the highest gross profit margin are
the most important to your business, as they generate more
money. Once you have identified your most profitable items you
should concentrate on achieving higher sales targets for them. This
may require you to rethink aspects of your business or to devise
strategies for improvement. Consider using a business adviser to
help you.
 Derivatives
• A derivative is a contract between two parties
which derives its value/price from an
underlying asset. The most common types of
derivatives are futures, options, forwards and
swaps. Description: It is a financial instrument
which derives its value/price from the
underlying assets.
partial derivatives
optimization