MANAGERIAL ECONOMICS

UNIT 1 and Unit 2

Basic concept
 Scarcity of resources
 Resources have alternate uses
 Micro level (farmer)
 Macro level (government)
 So, we can say that economics is problem of
management of resources.
Nature and scope
 The most important function in managerial
economics is decision-making. It involves the
complete course of selecting the most suitable
action from two or more alternatives.
 The primary function is to make the most
profitable use of resources which are limited such as
labor, capital, land etc.
 A manager is very careful while taking decisions
as the future is uncertain; he ensures that the best
possible plans are made in the most effective
 manner to achieve the desired objective which is
profit maximization.
 Economic theory and economic analysis are
used to solve the problems of managerial
economics.
 Economics basically comprises of two main
divisions namely Micro economics and Macro
economics
 Managerial economics covers both
macroeconomics as well as microeconomics, as both
are equally important for decision making and
business analysis.
 Macroeconomics deals with the study of entire
economy. It considers all the factors such as
government policies, business cycles, national
income, etc.
 Microeconomics includes the analysis of small
individual units of economy such as individual firms,
individual industry, or a single individual consumer.
Scope of Managerial economics
 All the economic theories, tools, and concepts are
covered under the scope of managerial economics to
analyze the business environment.
 The scope of managerial economics is a
continual process, as it is a developing science.
 Demand analysis and forecasting, profit
management, and capital management are also
considered under the scope of managerial
economics.
 Demand Analysis and Forecasting:
Demand analysis and forecasting involves huge
amount of decision-making! Demand
estimation is an integral part of decision
making, an assessment of future sales helps in
strengthening the market position and
maximizing profit. In managerial economics,
demand analysis and forecasting holds a very
important place.
 Profit Management:Success of a firm
depends on its primary measure and that is
profit. Firms are operated to earn long term
profit which is generally the reward for risk
 taking. Appropriate planning and measuring
profit is the most important and challenging
area of managerial economics.
Capital Management:Capital management
involves planning and controlling of expenses.
There are many problems related to capital
investments which involve considerable amount
of time and labor. Cost of capital and rate of
return are important factors of capital
management
Micro economics
 It is study of economic issues considering
small economic units. e.g. individual consumer/
individual firm(theory of consumer behavior/
theory of demand), individual producer ( theory
of supply) etc.
 Theory of consumer behavior: it analysis
how consumer allocates his income to different
uses so that he maximizes his satisfaction.
 Theory of producer behavior : it analyze
the producers choice of input of resources,
product and quantity of production.
 Theory of price : it analyze how prices of
goods are determined in the commodity market.
 Basic Concepts of Microeconomics
 The study of microeconomics involves
several key concepts, including (but not limited
to):
(i) Production theory
 This is the study of production — or the
process of converting inputs into outputs.
Producers seek to choose the combination of
inputs and method of combining them that will
minimize cost in order to maximize their profits.
(ii) Utility theory
 Analogous to production theory, consumers
will choose to purchase and consume a
combination of goods that will maximize their
happiness or “utility”, subject to the constraint
of how much income they have available to
spend.
(iii) Price theory
 Production theory and utility theory interact
to produce the theory of supply and demand,
which determine prices in a competitive market.
In a perfectly competitive market, it concludes
that the price demanded by consumers is the
same supplied by producers. That results in
economic equilibrium.
 (iv) Industrial organization and market
structure
 Microeconomists study the many ways that
markets can be structured, from perfect
competition to monopolies, and the ways that
production and prices will develop in these
different types of markets.
Macro economics
 It is study of economic issues at the level
of economy as a whole.
 Basic problem ( rational management of
resources) is same as micro-economics, but
focus shifts from maximisation of
individuals gain to the maximization of
social welfare.
Managerial Economics and its Relevance
in Business Decisions
1.Useful in Business Organization
 In any institution or firm. How should
any production be done, and for whom
should be produced? The answer to all these
questions remains only with the managerial
 economy because he plays the most
important role in these tasks.
 So we can say that managerial
economics plays a very big role and
significance in the important decisions of the
business.
 So this is a very good Role and
Importance of Managerial Economics in
Choosing Right Decisions of any business.
2.Helpful in Chalking Out Business
Policies
 The art is only in business economics to
maximize the profit of any institution and
minimize cost and whatever policies are
made from this.
 It is very useful for any business or firm
so that every firm and business can get the
maximum benefit.
 Then we can say that there is a huge
contribution of managerial economics to
profit maximization and determining
policies. It also helps in doing it.
 3.Help in Business Planning
 Business economics is very useful in
planning a complete prospect among the
successful operation and production of any
business or firm. Which acts as a balance
bridge between the production tools and
operating systems and where to go.
 So this is the biggest and important role
of business economics in any business or
firm.
4.Helpful in Cost Control
 Managerial economics decides the
business is going towards profit or loss.
managerial economics decides which way is
good for the business.
 And it is only possible when managerial
economics plays a very big and important
role in cost control decisions.
 Thus, Role and Importance of
Managerial Economics in Choosing Right
Decisions is very powerful.
 6.Useful in Coordination of Business
Activities
 Managerial economics is useful in
coordinating the various activities of a
business.
7.Useful In Demand for Casting
 Managerial economics provides useful
tools for economics managers in demand
forecasts and is useful in demanding
production planning.
 The managerial economy deals with
future losses easily. So that any business can
be protected against future losses.
9.Helpful in Price Determination
 Managerial Economics provides the
necessary guidance in managing the pricing
of its business. This proves this in order to
raise the required data in pricing and get the
maximum benefit.
 So that is the major role of managerial
economics in the business decision critical.
Without this, no business can progress.
7.Helpful in Profit Planning and Control
 Managerial economics helps managers
to decide on the planning and control of the
benefits.
 Managerial Economics is synchronized
between the planning and control of any
institution or firm and hence its importance
increases.
 Thus, it plays a huge role in business
decisions. So its Role And Importance Of
Managerial Economics In taking Right
Decisions.
8.Helpful for Business Prediction
 It is not known to anyone about what is
going on in the business. Therefore, business
economics tells us that the business can see
what is troubling in the future.
 So, Then the managerial economics
gives its solutions. So that they can be
avoided and the benefits can be increased.
Central problem of an economy
 Q1. what to produce?
 What goods and services to produce?
 In what quantity goods aqnd services
are to be produces?
 This problem becomes complex when
choice is to be made across consumer
goods(essential to promote quality of
life) and capital goods(essential to
increase production capacity). As there
is no “either-or”choice in this and both
consumer and capital goods are of
significance.
 Q2. How to produce?
 It refers to the technique of
production.
(i)Labor intensive technique:
 Implies greater use of labor
 Less expensive
 Reduce un employment
(ii)Capital intensive technique:
 Implies greater use capital
 Promotes efficiency
  Pushes up pace of growth
Central problem of an economy
The choice between labor intensive and
capital intensive techniques becomes a
problem because producers needs to
minimize their costs and at the same time
want to maximize their efficiency.
Q3. For whom to produce?
 It refers to the problem of distribution
of output( or income) in the economy.
(i) Factorial distribution
 It is the income share of different
factors of production. i.e. wages to labor,
interest for capital, rent for land.
(ii) Interpersonal distribution of
income
It refers to the income share of individual
and households in the society.
 Basic question revolves around the
equality/inequality in the society.
 Solution to Central problem of an
economy
 Market economy
 Centrally planned economy
 Mixed economy
Market economy
 It is a free economy in which
producers are free to decide what ,how
& for whom to produce.
 Q1. What to produce?
 Goods and services which are more
in demand and less in supply.
 Q2. How to produce?
 Producers will use inputs which keep
their cost of production as low as
possible to maximize Profits.
 Q3. For whom to produce?
 Goods are produced for those who
can afford to pay high price.
Centrally planned economy
 Social justice is given priority than
profit maximization.
 Decisions like
 Q1. What to produce?
 Q2. How to produce?
 Q3. For whom to produce?
 Are taken by the central authority
appointed by the government.
 Those goods/services are produced
which are most useful for the society by
techniques of production which is most
useful socially.
