Managerial Economics

• Branch of Economics.
• ‘Managerial Economics is the study of Economic
Theories, Principles and Concepts which is used
in Managerial Decision Making.’
• ‘Managerial Economics is the Application of
various Theories, Concepts and Principles of
Economics in the Business Decisions.’
• It also Includes ‘The Application of Mathematical
and Statistical tools in Management decisions.’
Managerial Economics
Application of Mathematical
And Statistical tools

Economic
Applicatio
Theories, n Managerial
Principles Decision
Applicatio
and n Making.
Concepts.
 Managerial Economics
Managerial Decisions
Choice of product
Choice of production method
Choice of price, Etc…

Application of Application of
Economic concepts, Analytical tools such
Theories and as, Mathematical
Principles in and Statistical tools
decision Making
Managerial Economics
‘Application of Economic
Concepts, Theories and
Analytical tools to find
solutions for managerial
problems.
 Managerial Economics
• Economics.
– Theories
– Principles
– Concepts
• Decision Making.
– Selection of best alternative out of various
possible alternatives.
Risk & Uncertainty
 Economics
Economics: ‘A Queen of Social Sciences’
Economics ‘OIKOS’ ‘NOMOS’ (Greek Words)

‘OIKOS’ ‘HOUSE’
‘NOMOS’ ‘MANAGEMENT’

According to J.S. Mill Economics is “The practical science of

production and distribution of wealth.”
‘It is the study of How people produce and spend
income.’
 Economics
It talks about ‘Economic Activity’ and
‘Economic Problem’.
‘It is the Study of Logic choice between Scarce resources
and unlimited wants’
‘Economics is to get the answer to the basic questions of
an economy such as, What to produce?, How to produce?
And for whom to produce?’
‘Economics is the social science that is concerned with
the production, distribution, and consumption of goods
and services.’
 Economics
There are Two Branches
Micro Economics: Means ‘Small’ or
‘Individual’.
The term ‘MICRO’ comes from the Greek
word
‘MIKROS’ Which means ‘Small’ or ‘Individual’.

Macro Economics: Means ‘Group’ or ‘Whole’.

The term ‘MACRO’ comes from the Greek
word ‘MAKROS’ Which means ‘Large’ or
‘Whole’.
 Micro Economics
• Micro Economics: ‘It is the study of particular
firms, particular households, individual prices,
wages, incomes, individual industries,
particular industries.”
• Some of the theories which come under Micro
Economics,
– Theory of Individual/Market Demand.
– Theory of Production and Cost.
– Theory of Markets and price.
– Theory of profit, Etc…
 Macro Economics
• Macro Economics: ‘It deals not with individual
quantities as such but with aggregates of these
quantities, not with individual incomes but with
national income.’
• Some of the theories which come under Macro Economics,
– Theory of total output and employment.
– General price level.
– Theory of Inflation.
– Theory of trade cycles
– Economic growth, Etc…
 Difference between Managerial Economics
and Economics
Economics
1.Comprehensive and wider
scope
2.It has both Micro and Macro in
nature
3.It is both Normative and
positive science
4.It is concerned with the
formulation of theories and
principles
5.It discusses general problems
Managerial Economics
1.Narrow and limited scope
2.It is essentially Micro in nature
and Macro in analysis
3.It is mainly a Normative science
4.It is concerned with the
application of theories and
principles of economics
5.It discusses Individual problems
 Nature of Managerial Economics
 Science as well as Art of decision making.
 It is essentially Micro in nature but Macro in
analysis.
 It is mainly a Normative science but positive in
analysis.
 It is concerned with the application of theories and
principles of economics.
 It discusses Individual problems.
 It is dynamic in nature not a Static.
 It discuss the economic behavior of a firm.
 It concentrates on optimum utilization of resources.
 Scope of Managerial Economics
 Objectives of a Firm.
 Demand Analysis and Forecasting.
 Production and cost analysis.
 Pricing decisions.
 Profit management.
 Capital management.
 Market structure.
 Inflation and economic conditions.
 Managerial economics and
Decision Making
• Decision making:
– Decision making on internal affairs.
– Decision making on external affairs.
Internal affairs talk on internal environment which
consists of internal factors such as, Production,
Financial, Marketing and Human resource related
decisions.
External Affairs talk on external environment
which consists of external factors such as, PEST
related decisions.
 Decision Making
• Uncertainty:
– Nothing can be expectable because of the
constant changes in the environment both
internally as well as externally.
• Risk:
– It is the situation which comes under uncertainty.
 Decision???????????????
How to take decision????????????

By using….
Economic Models
 Economic Models

Economic model
is the structural and scientific method of
constructing or developing Solutions by
using basic economic principles,
concepts, theories and Quantitative
techniques such as mathematical and
statistical tools.
 Conclusion for
decisions.
ct
ru
t els
s
n od Evaluating results

c o
t o cM Testing of
ps m i Hypothesis
e
St on o Analysis of data using Basic Principles
Ec of economics and Quantitative
Techniques.

Data collection

Formulation of
hypothesis

Defining the
problem
 Basic Principles of Managerial
Economics
Opportunity cost principle.
Marginalism principle.
Equi-marginalism principle.
Incremental principle.
Time perspective principle.
Discounting principle.
 Opportunity Cost Principle
Choice involves sacrifice.
The cost involved with the sacrifice
It is the cost of an next best opportunity which is
lost will be called as Opportunity cost.
Ex: 100 Rs can be used for purchasing book or
eating in pizza corner or purchasing of
stationeries.
Now the cost of purchasing book is also include
the cost of ‘Eating pizza.’
Opportunity Cost in Management

A Production possibility curve

C X

C1 Y

X
O D D1 B
 Marginalism Principle
Marginal cost
and
Marginal profit/benefit
Marginal cost is the cost which incurred to
produce the next or one more unit.
Marginal Revenue is the benefit which gets by
producing one more or next unit.
Cost will be less and benefit will be more.
 Marginalism Principle
• Marginal cost (MC)= (TC)n - (TC)n-1

• Marginal Revenue(MR)=(TR)n – (TR)n-1

Decision Rule:
MR > MC…..MR=MC…..MR<MC
 Equi-marginalism Principle
• Allocation of scarce resources on different
alternative uses should be equally distributed.

i.e.. MPa = MPb =MPc =MPd

Or
MPa = MPb = MPc = MPd
COPa COPb COPc COPd.
 Incremental Principle
• Incremental principle gives an idea to increase
the production not only with one more
product it could be any quantity till the profit
exists.
• According to this principle profit can be
existed either by increasing sales or total
revenue or by decreasing total cost
• Decision Rule,  
• i.e. TC<TR……TC=TR……TC>TR
 Time Perspective Principle
• According to the principle all decisions should
be under two formats i.e. short run and long
run, Because of the decisions characteristics.
• So each decision should be made in Short run
basis as well as long run basis.
• According to short run decision the long run
decision will get change.
 Discounting Principle
• According to this principle, if a decision affects
costs and revenues in long-run, all those costs
and revenues must be discounted to present
values before valid comparison of alternatives
is possible. This is essential because a rupee
worth of money at a future date is not worth a
rupee today. Money actually has time value.
 Discounting Principle
• This could be understood using the formula,

FV = PV*(1+r) t And
PV = FV/ (1+r) t

• Where, FV is the future value, PV is the

present value, r is the discount (interest) rate,
and t is the time between the future value and
present value.
 Quantitative Techniques used in
Managerial Economics
• Variables
• Functions
• Schedules
• Graphs
• Derivatives
• Differentiation
• Integration etc…