Unit 1

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w0\charscalex95 \ul0\nosupersub\cf3\f4\fs36 UNIT 1 \up0 \expndtw0\charscalex96 S
COPE OF MANAGERIAL\par\pard\ql \li2613\sb18\sl-414\slmult0 \up0 \expndtw0\charsc
alex97 ECONOMICS\par\pard\column \ql \li10196\sb0\sl-184\slmult0 \par\pard\ql \l
i10196\sb0\sl-184\slmult0 \par\pard\ql \li20\sb82\sl-184\slmult0 \up0 \expndtw0\
charscalex109 \ul0\nosupersub\cf2\f3\fs16 Introduction to\par\pard\ql \li486\sb8
\sl-184\slmult0 \up0 \expndtw0\charscalex107 Microbes \par\pard\sect\sectd\sbkno
ne \ql \li1167\sb229\sl-276\slmult0 \up0 \expndtw-4\charscalex100 \ul0\nosupersu
b\cf4\f5\fs24 Objectives \par\pard\ql \li1167\sb183\sl-253\slmult0 \up0 \expndtw
-5\charscalex100 \ul0\nosupersub\cf1\f2\fs22 After studying this unit, you shoul
d be able to: \par\pard\ql \li1450\ri4920\sb31\sl-346\slmult0 \up0 \expndtw-4\ch
arscalex100 \ul0\nosupersub\cf5\f6\fs22 understand \ul0\nosupersub\cf1\f2\fs22 t
he nature and scope of managerial economics; \line \up0 \expndtw-5\charscalex100
\ul0\nosupersub\cf5\f6\fs22 familiarize\ul0\nosupersub\cf1\f2\fs22 yourself wi
th economic terminology; \line \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf5
\f6\fs22 develop\ul0\nosupersub\cf1\f2\fs22 some insight into economic issues;
\line \up0 \expndtw-5\charscalex100 \ul0\nosupersub\cf5\f6\fs22 acquire\ul0\nosu
persub\cf1\f2\fs22 some information about economic institutions; \par\pard\ql \
li1450\sb91\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\
fs22 understand\ul0\nosupersub\cf1\f2\fs22 the concept of trade-offs or policy
options facing society today. \par\pard\ql \li1167\sb168\sl-276\slmult0 \up0 \ex
pndtw-9\charscalex100 \ul0\nosupersub\cf4\f5\fs24 Structure \par\pard\li1167\sb1
98\sl-253\slmult0\fi0\tx1706 \up0 \expndtw-4\charscalex100 \ul0\nosupersub\cf1\f
2\fs22 1.1\tab \up0 \expndtw-4\charscalex100 Introduction\par\pard\li1167\sb92\s
l-253\slmult0\fi0\tx1707 \up0 \expndtw-4\charscalex100 1.2\tab \up0 \expndtw-4\c
harscalex100 Fundamental Nature of Managerial Economics\par\pard\li1167\sb91\sl253\slmult0\fi0\tx1707 \up0 \expndtw-4\charscalex100 1.3\tab \up0 \expndtw-4\cha
rscalex100 Scope of Managerial Economics\par\pard\li1167\sb90\sl-253\slmult0\fi0
\tx1708 \up0 \expndtw-4\charscalex100 1.4\tab \up0 \expndtw-4\charscalex100 Appr

opriate Definitions\par\pard\li1167\sb92\sl-253\slmult0\fi0\tx1707 \up0 \expndtw
-4\charscalex100 1.5\tab \up0 \expndtw-4\charscalex100 Managerial Economics and
other Disciplines\par\pard\li1167\sb91\sl-253\slmult0\fi0\tx1709 \up0 \expndtw-4
\charscalex100 1.6\tab \up0 \expndtw-4\charscalex100 Economic Analysis\par\pard\
li1167\sb90\sl-253\slmult0\fi0\tx1707 \up0 \expndtw-4\charscalex100 1.7\tab \up0
\expndtw-4\charscalex100 Basic Characteristics: Decision-Making\par\pard\li1167
\sb92\sl-253\slmult0\fi0\tx1707 \up0 \expndtw-4\charscalex100 1.8\tab \up0 \expn
dtw-4\charscalex100 Summary\par\pard\li1167\sb91\sl-253\slmult0\fi0\tx1707 \up0
\expndtw-4\charscalex100 1.9\tab \up0 \expndtw-4\charscalex100 Self-Assessment Q
uestions\par\pard\li1167\sb90\sl-253\slmult0\fi0\tx1707 \up0 \expndtw-4\charscal
ex100 1.10\tab \up0 \expndtw-4\charscalex100 Further Readings\par\pard\ql \li116
7\sb0\sl-322\slmult0 \par\pard\ql\li1167\sb237\sl-322\slmult0\tx1797 \up0 \expnd
tw0\charscalex102 \ul0\nosupersub\cf6\f7\fs28 1.1 \tab \up0 \expndtw-3\charscale
x100 INTRODUCTION \par\pard\ql \li1167\sb235\sl-253\slmult0 \up0 \expndtw-3\char
scalex100 \ul0\nosupersub\cf1\f2\fs22 For most purposes economics can be divided
into two broad categories, \par\pard\ql \li1167\ri3192\sb20\sl-262\slmult0 \up0
\expndtw-3\charscalex100 microeconomics and macroeconomics. Macroeconomics as t
he name suggests is \up0 \expndtw-4\charscalex100 the study of the overall econo
my and its aggregates such as Gross National \line \up0 \expndtw-4\charscalex100
Product, Inflation, Unemployment, Exports, Imports, Taxation Policy etc. \line
\up0 \expndtw-2\charscalex100 Macroeconomics addresses questions about changes i
n investment, government \line \up0 \expndtw-3\charscalex100 spending, employmen
t, prices, exchange rate of the rupee and so on. Importantly, \up0 \expndtw-2\ch
arscalex100 only aggregate levels of these variables are considered in the study
of \line \up0 \expndtw-3\charscalex100 macroeconomics. But hidden in the aggreg
ate data are changes in output of a \line \up0 \expndtw-4\charscalex100 number o
f individual firms, the consumption decision of consumers like you, and the \up0
\expndtw-5\charscalex100 changes in the prices of particular goods and services
. \par\pard\ql \li1167\sb0\sl-263\slmult0 \par\pard\ql\li1167\ri3162\sb15\sl-263
\slmult0 \up0 \expndtw-2\charscalex100 Although macroeconomic issues are importa
nt and occupy the time of media and \line \up0 \expndtw-3\charscalex100 command
the attention of the newspapers, micro aspects of the economy are also \line \up
0 \expndtw-2\charscalex100 important and often are of more direct application to
the day to day problems facing \line \up0 \expndtw-3\charscalex100 a manager. M
icroeconomics deals with individual actors in the economy such as \line \up0 \ex
pndtw-3\charscalex100 firms and individuals. Managerial economics can be thought
of as applied \line \up0 \expndtw-4\charscalex100 microeconomics and its focus
is on the interaction of firms and individuals in \line \up0 \expndtw-5\charscal
ex100 markets. \par\pard\ql \li1167\sb0\sl-253\slmult0 \par\pard\ql\li1167\sb13\
sl-253\slmult0 \up0 \expndtw-3\charscalex100 When you read a newspaper or switch
on a television, you hear economic \par\pard\ql \li1167\sb7\sl-253\slmult0 \up0
\expndtw-3\charscalex100 terminology used with increasing regularity. For a man
ager, some of these \par\pard\qj \li1167\ri3552\sb22\sl-260\slmult0 \up0 \expndt
w-4\charscalex100 economic terms are of direct relevance and therefore it is ess
ential to not only \line \up0 \expndtw-3\charscalex100 understand them but also
apply them in relevant situations. For example, GDP \line \up0 \expndtw-3\charsc
alex100 growth rate could impact the product a manager is marketing, change in m
oney \par\pard\ql \li11254\sb126\sl-253\slmult0 \up0 \expndtw-3\charscalex100 1
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\par\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \p
ar\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par
\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par\p
ard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par\par
d\ql \li567\sb66\sl-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf
1\f2\fs22 2\par\pard\column \ql \li3401\sb0\sl-253\slmult0 \par\pard\ql \li20\sb
184\sl-253\slmult0 \up0 \expndtw-3\charscalex100 supply by the RBI could impact
inflation and affect the demand for your product,\par\pard\ql \li20\ri958\sb3\sl
-263\slmult0 \up0 \expndtw-2\charscalex100 fiscal deficit could affect interest
rates and therefore investment spending by a \line \up0 \expndtw-1\charscalex100
manager etc. The focus of managerial economics is on how the firm reacts to \li
ne \up0 \expndtw-2\charscalex100 changes in the economic environment in which it
operates and how it predicts these \up0 \expndtw-1\charscalex100 changes and de
vises the best possible strategies to achieve the objectives that \line \up0 \ex
pndtw-4\charscalex100 underlie its existence.\par\pard\ql \li3401\sb0\sl-263\slm
ult0 \par\pard\ql \li20\ri974\sb2\sl-263\slmult0 \up0 \expndtw-4\charscalex100 T
he economy is the institutional structure through which individuals and firms in
a \line \up0 \expndtw-2\charscalex100 society coordinate their desires. Economi
cs is the study of how human beings in a \line \up0 \expndtw-2\charscalex100 soc
iety go about achieving their wants and desires. It is also defined as the study
of \line \up0 \expndtw-2\charscalex100 allocation of scarce resources to satisf
y individual wants or desires. The latter is \line \up0 \expndtw-2\charscalex100
perhaps the best way to broadly define the study of economics in general. The \
line \up0 \expndtw-2\charscalex100 emphasis is on allocation of scarce resources
across competing ends. You should \line \up0 \expndtw-2\charscalex100 recognize
that human wants are unlimited and therefore choice is necessary. \line \up0 \e
xpndtw-2\charscalex100 Choices necessarily involve trade-offs. For example, if y
ou wish to acquire an \line \up0 \expndtw-2\charscalex100 MBA degree, you must t
ake time off to devote to study. Your time has many uses \line \up0 \expndtw-3\c
harscalex100 and when you devote more time to study you are allocating it to a p
articular use in \line \up0 \expndtw-3\charscalex100 order to achieve your goal.
Economics would be a most uninteresting subject if \line \up0 \expndtw-3\charsc
alex100 resources were unlimited and no trade offs were involved in decision mak
ing.\par\pard\qj \li3401\sb0\sl-263\slmult0 \par\pard\qj \li20\ri1169\sb2\sl-263
\slmult0 \up0 \expndtw-2\charscalex100 There are many general insights economist
s have gained into how the economy \up0 \expndtw-3\charscalex100 functions. Econ
omic theory ties together economists\u8217? terminology and knowledge \up0 \expn
dtw-4\charscalex100 about economic institutions. An economic institution is a ph
ysical or mental\par\pard\ql \li20\ri958\sb1\sl-263\slmult0 \up0 \expndtw-3\char
scalex100 structure that significantly influences economic decisions. Corporatio
ns, \line \up0 \expndtw-3\charscalex100 governments, markets are all economic in
stitutions. Similarly cultural norms are the \up0 \expndtw-2\charscalex100 stand
ards people use when they determine whether a particular activity or \line \up0
\expndtw-2\charscalex100 behaviour is acceptable. For example, Hindus avoid meat
and fish on Tuesdays. \up0 \expndtw-2\charscalex100 This has an economic dimens
ion as it has a direct impact on the sale of these items \up0 \expndtw-3\charsca
lex100 on Tuesdays. Further, economic policy is the action usually taken by the
\line \up0 \expndtw-4\charscalex100 government, to influence economic events. An
d finally, economic reasoning helps in \up0 \expndtw-3\charscalex100 thinking li
ke an economist. Economists analyse questions and issues on the basis of \up0 \e
xpndtw-1\charscalex100 trade-offs i.e. they compare the cost and the benefits of
every issue and make \line \up0 \expndtw-2\charscalex100 decisions based on tho
se costs and benefits.\par\pard\ql \li3401\sb0\sl-264\slmult0 \par\pard\ql \li20
\ri1154\sb1\sl-264\slmult0 \up0 \expndtw-3\charscalex100 The market is perhaps t
he single most important and complex institution in our \line \up0 \expndtw-3\ch
arscalex100 economy. A market is not necessarily a physical location, but a desc
ription of any \line \up0 \expndtw-2\charscalex100 state that involves exchange.
The exchange could be instantaneous or it could be \line \up0 \expndtw-1\charsc
alex100 over time i.e. exchange which is agreed today but where the transaction
takes\par\pard\qj \li20\ri1183\sb1\sl-264\slmult0 \up0 \expndtw-3\charscalex100
place, say after 3 months. You will learn in this course the myriad functions th
at \up0 \expndtw-3\charscalex100 markets perform, most significantly bringing bu
yers and sellers together. Markets \up0 \expndtw-4\charscalex100 could be compet
itive or monopolistic, with a large number of firms or a small\par\pard\ql \li20
\ri928\sb1\sl-264\slmult0 \up0 \expndtw-3\charscalex100 number of firms, with fr
ee entry and exit or government licensing restricting entry \line \up0 \expndtw2\charscalex100 of firms and so on. The major point is that firms operate in dif
ferent types of \line \up0 \expndtw-3\charscalex100 markets and use the well-est
ablished principles of managerial economics to improve \line \up0 \expndtw-3\cha
rscalex100 profitability. Managerial economics draws on economic analysis for su
ch concepts \line \up0 \expndtw-2\charscalex100 as cost, demand, profit and comp

etition. It attempts to bridge the gap between the \line \up0 \expndtw-3\charsca
lex100 purely analytical problems that intrigue many economic theorists and the
day-to-day \line \up0 \expndtw-1\charscalex100 decisions that managers must face
. It offers powerful tools and approaches for \line \up0 \expndtw-3\charscalex10
0 managerial policy-making. It will be relevant to present here several examples
\line \up0 \expndtw-2\charscalex100 illustrating the problems that managerial e
conomics can help to address. These also \line \up0 \expndtw-3\charscalex100 exp
lain how managerial economics is an integral part of business. Demand, supply, \
line \up0 \expndtw-3\charscalex100 cost, production, market, competition, price
etc. are important concepts in real \line \up0 \expndtw-4\charscalex100 business
decisions. \par\pard\sect\sectd\fs24\paperw11900\paperh16820\pard\sb0\sl-240{\b
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f7\fs28 1.2\tab \up0 \expndtw-3\charscalex100 FUNDAMENTAL NATURE OF MANAGERIAL\p
ar\pard\ql \li1797\sb14\sl-322\slmult0 \up0 \expndtw0\charscalex100 ECONOMICS\pa
r\pard\column \ql \li9776\sb0\sl-184\slmult0 \par\pard\ql \li9776\sb0\sl-184\slm
ult0 \par\pard\ql \li20\sb78\sl-184\slmult0 \up0 \expndtw0\charscalex110 \ul0\no
supersub\cf2\f3\fs16 Scope of Managerial\par\pard\ql \li800\sb8\sl-184\slmult0 \
up0 \expndtw0\charscalex107 Economics \par\pard\sect\sectd\sbknone \ql \li1167\s
b0\sl-253\slmult0 \par\pard\ql\li1167\sb16\sl-253\slmult0 \up0 \expndtw-3\charsc
alex100 \ul0\nosupersub\cf1\f2\fs22 A close relationship between management and
economics has led to the \par\pard\ql \li1167\ri3222\sb0\sl-263\slmult0 \up0 \ex
pndtw-3\charscalex100 development of managerial economics. Management is the gui
dance, leadership \line \up0 \expndtw-2\charscalex100 and control of the efforts
of a group of people towards some common objective. \line \up0 \expndtw-3\chars
calex100 While this description does inform about the purpose or function of man
agement, it \line \up0 \expndtw-2\charscalex100 tells us little about the nature
of the management process. Koontz and O\u8217?Donell \line \up0 \expndtw-2\char
scalex100 define management as the creation and maintenance of an internal envir
onment in \line \up0 \expndtw-3\charscalex100 an enterprise where individuals, w
orking together in groups, can perform efficiently \line \up0 \expndtw-3\charsca
lex100 and effectively towards the attainment of group goals. Thus, management i
s -\par\pard\ql \li1450\sb105\sl-253\slmult0 \up0 \expndtw-7\charscalex100 Coord
ination \par\pard\ql \li1450\ri3754\sb0\sl-360\slmult0 \up0 \expndtw-4\charscale
x100 An activity or an ongoing process \line \up0 \expndtw-4\charscalex100 A pur
posive process \par\pard\ql \li1450\sb68\sl-253\slmult0 \up0 \expndtw-4\charscal
ex100 An art of getting things done by other people. \par\pard\qj \li1167\ri3147
\sb253\sl-270\slmult0 \up0 \expndtw-3\charscalex100 On the other hand, economics
as stated above is engaged in analysing and providing \up0 \expndtw-2\charscale
x100 answers to manifestations of the most fundamental problem of scarcity. Scar
city of \up0 \expndtw-4\charscalex100 resources results from two fundamental fac
ts of life: \par\pard\ql \li1450\sb85\sl-253\slmult0 \up0 \expndtw-5\charscalex1
00 Human wants are virtually unlimited and insatiable, and \par\pard\ql \li1450\
sb107\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Economic resources to satisfy
these human demands are limited. \par\pard\qj \li1167\sb0\sl-260\slmult0 \par\p
ard\qj\li1167\ri3719\sb2\sl-260\slmult0 \up0 \expndtw-3\charscalex100 Thus, we c
annot have everything we want; we must make choices broadly in \up0 \expndtw-5\c
harscalex100 regard to the following: \par\pard\ql \li1450\sb106\sl-253\slmult0
\up0 \expndtw-4\charscalex100 What to produce? \par\pard\ql \li1450\ri4227\sb0\s
l-360\slmult0 \up0 \expndtw-4\charscalex100 How to produce? and \line \up0 \expn
dtw-4\charscalex100 For whom to produce? \par\pard\ql \li1167\ri3146\sb199\sl-26
4\slmult0 \up0 \expndtw-3\charscalex100 These three choice problems have become
the three central issues of an economy \line \up0 \expndtw-2\charscalex100 as sh
own in figure 1.1. Economics has developed several concepts and analytical \line
\up0 \expndtw-2\charscalex100 tools to deal with the question of allocation of
scarce resources among competing \line \up0 \expndtw-2\charscalex100 ends. The n
on-trivial problem that needs to be addressed is how an economy \line \up0 \expn
dtw-3\charscalex100 through its various institutions solves or answers the three
crucial questions posed \line \up0 \expndtw-3\charscalex100 above. There are th

ree ways by which this can be achieved. One, entirely by the \line \up0 \expndtw
-3\charscalex100 market mechanism, two, entirely by the government or finally, a
nd more reasonably, \line \up0 \expndtw-3\charscalex100 by a combination of the
first two approaches. Realistically all economies employ the \line \up0 \expndtw
-2\charscalex100 last option, but the relative roles of the market and governmen
t vary across \line \up0 \expndtw-2\charscalex100 countries. For example, in Ind
ia the market has started playing a more important \line \up0 \expndtw-2\charsca
lex100 role in the economy while the government has begun to withdraw form certa
in \line \up0 \expndtw-3\charscalex100 activities. Thus, the market mechanism is
gaining importance. A similar change is \line \up0 \expndtw-3\charscalex100 hap
pening all over the world, including in China. But there are economies such as \
line \up0 \expndtw-3\charscalex100 Myanmar and Cuba where the government still p
lays an overwhelming part in \line \up0 \expndtw-4\charscalex100 solving the res
ource allocation problem. Essentially, the market is supposed to guide \line \up
0 \expndtw-3\charscalex100 resources to their most efficient use. For example if
the salaries earned by MBA \line \up0 \expndtw-2\charscalex100 degree holders c
ontinue to rise, there will be more and more students wanting to \line \up0 \exp
ndtw-3\charscalex100 earn the degree and more and more institutes wanting to pro
vide such degrees to \line \up0 \expndtw-3\charscalex100 take advantage of this
opportunity. The government may not force this to happen, it \line \up0 \expndtw
-3\charscalex100 will happen on its own through the market mechanism. The govern
ment, if anything, \line \up0 \expndtw-3\charscalex100 could provide a regulator
y function to ensure quality and consumer protection. \par\pard\ql \li1167\sb0\s
l-253\slmult0 \par\pard\ql\li1167\sb13\sl-253\slmult0 \up0 \expndtw-3\charscalex
100 According to the central deduction of economic theory, under certain conditi
ons, \par\pard\ql \li1167\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 marke
ts allocate resources efficiently. \u8216?Efficiency\u8217? has a special meanin
g in this \par\pard\qj \li1167\ri3222\sb0\sl-280\slmult0 \up0 \expndtw-4\charsca
lex100 context. The theory says that markets will produce an outcome such that,
given the \line \up0 \expndtw-4\charscalex100 economy\u8217?s scarce resources,
it is impossible to make anybody better-off without \par\pard\li1167\sb1\sl-244\
slmult0\fi0\tx11254 \up0 \expndtw-3\charscalex100 making somebody else worse-off
.\tab \up0 \expndtw-3\charscalex100 3
}}
}}\par\pard\sect\sectd\fs24\paperw11900\paperh16820
{\sp{\sn shapeType}{\sv 202}}{\sp{\sn fFlipH}{\sv 0}}{\sp{\sn fFlipV}{\sv 0}}{\s
p{\sn fRecolorFillAsPicture}{\sv 0}}{\sp{\sn fUseShapeAnchor}{\sv 0}}{\sp{\sn fL
ine}{\sv 0}}{\sp{\sn fFilled}{\sv 0}}{\sp{\sn fLayoutInCell}{\sv 1}}{\sp{\sn fBe
hindDocument}{\sv 1}}{\shptxt\pard\plain \qj\sl147 \li0\ri0 \expndtw-2\charscale
x100\ul0\nosupersub\cf10\f11\fs20 What do produce?{\par}}}}\pard\sb0\sl-240{\bkm
kstart Pg4}{\bkmkend Pg4}\par\pard\sect\sectd\sbknone\cols2\colno1\colw3241\cols
r160\colno2\colw8359\colsr160\ql \li567\sb0\sl-184\slmult0 \par\pard\ql \li567\s
b0\sl-184\slmult0 \par\pard\ql \li567\sb78\sl-184\slmult0 \up0 \expndtw0\charsca
lex110 \ul0\nosupersub\cf2\f3\fs16 Introduction to Managerial\par\pard\ql \li567
\sb8\sl-184\slmult0 \up0 \expndtw0\charscalex107 Economics\par\pard\ql \li567\sb
0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\
sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl
-253\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-2
53\slmult0 \par\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\sl-253

\par\pard\ql \li567\sb66\sl-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosup
ersub\cf1\f2\fs22 4\par\pard\column \ql \li5026\sb0\sl-230\slmult0 \par\pard\ql
\li1645\sb226\sl-230\slmult0 \up0 \expndtw-7\charscalex100 \ul0\nosupersub\cf7\f
8\fs20 Figure 1.1: Three Choice Problems of an Economy\par\pard\ql \li3840\sb0\s
l-230\slmult0 \par\pard\ql \li3840\sb0\sl-230\slmult0 \par\pard\ql \li459\sb135\
sl-230\slmult0\tx4841 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf10\f11\fs2
0 Unlimited Choice\tab \up0 \expndtw-2\charscalex100 Limited Resources\par\pard\
ql \li6581\sb0\sl-253\slmult0 \par\pard\ql \li6581\sb0\sl-253\slmult0 \par\pard\
ql \li6581\sb0\sl-253\slmult0 \par\pard\ql \li3200\sb163\sl-253\slmult0 \up0 \ex
pndtw-3\charscalex100 \ul0\nosupersub\cf9\f10\fs22 SCARCITY\par\pard\ql \li3953\
sb0\sl-230\slmult0 \par\pard\ql \li3953\sb0\sl-230\slmult0 \par\pard\ql \li3953\
sb0\sl-230\slmult0 \par\pard\ql \li3953\sb0\sl-230\slmult0 \par\pard\ql \li3953\
sb0\sl-230\slmult0 \par\pard\ql \li3953\sb0\sl-230\slmult0 \par\pard\ql \li572\s
b41\sl-230\slmult0\tx2892\tx4814 \up0 \expndtw-5\charscalex100 \ul0\nosupersub\c
f7\f8\fs20 What to produce ?\tab \up0 \expndtw-2\charscalex100 \ul0\nosupersub\c
f10\f11\fs20 How to produce?\tab \up0 \expndtw-2\charscalex100 For whom to produ
ce?\par\pard\ql \li3401\sb0\sl-264\slmult0 \par\pard\ql \li20\ri989\sb164\sl-264
\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs22 In rich count
ries, markets are too familiar to attract attention. Yet, a certain awe is \up0
\expndtw-2\charscalex100 appropriate. Let us take an incident where Soviet plann
ers visited a vegetable \line \up0 \expndtw-2\charscalex100 market in London dur
ing the early days of perestroika, they were impressed to find \up0 \expndtw-2\c
harscalex100 no queues, shortages, or mountains of spoiled and unwanted vegetabl
es. They took \up0 \expndtw-3\charscalex100 their hosts aside and said: \u8220?W
e understand, you have to say it\u8217?s all done by supply \up0 \expndtw-2\char
scalex100 and demand. But can\u8217?t you tell us what\u8217?s really going on?
Where are your planners \up0 \expndtw-2\charscalex100 and what are their methods
?\u8221?\par\pard\ql \li3401\sb0\sl-264\slmult0 \par\pard\ql \li20\ri1033\sb1\sl
-264\slmult0 \up0 \expndtw-1\charscalex100 The essence of the market mechanism i
s indeed captured by the supply-and-\line \up0 \expndtw-3\charscalex100 demand d
iagram that you will become familiar with in Block 4. At the place where \line \
up0 \expndtw-2\charscalex100 the curves intersect, a price is set such that dema
nd equals supply. There, and only \line \up0 \expndtw-2\charscalex100 there, the
benefit from consuming one more unit exactly matches the cost of \line \up0 \ex
pndtw-3\charscalex100 producing it. If output were less, the benefit from consum
ing more would exceed \line \up0 \expndtw-3\charscalex100 the cost of producing
it. If output were higher, the cost of producing the extra units \line \up0 \exp
ndtw-2\charscalex100 would exceed the extra benefits. So the point where supply
equals demand is \line \up0 \expndtw-3\charscalex100 \u8220?efficient\u8221?.\pa
r\pard\ql \li3401\sb0\sl-264\slmult0 \par\pard\ql \li20\ri1004\sb1\sl-264\slmult
0 \up0 \expndtw-2\charscalex100 However, the conditions for market efficiency ar
e extremely demanding\u8212?far too \line \up0 \expndtw-2\charscalex100 demandin
g ever to be met in the real world. The theory requires \u8220?perfect \line \up
0 \expndtw-3\charscalex100 competition\u8221?: there must be many buyers and sel
lers; goods from competing \line \up0 \expndtw-4\charscalex100 suppliers must be
indistinguishable; buyers and sellers must be fully informed; and \line \up0 \e
xpndtw-1\charscalex100 markets must be complete\u8212?that is, there must be mar
kets not just for bread here \line \up0 \expndtw-2\charscalex100 and now, but fo
r bread in any state of the world. (What is the price today for a loaf \line \up
0 \expndtw-3\charscalex100 to be delivered in Timbuktu on the second Tuesday in
December 2014 if it rains?)\par\pard\ql \li3401\sb0\sl-253\slmult0 \par\pard\ql
\li20\sb21\sl-253\slmult0 \up0 \expndtw-2\charscalex100 In other words, market f
ailure is pervasive. It comes in four main varieties:\par\pard\qj \li3401\sb0\sl
-263\slmult0 \par\pard\qj \li20\ri1035\sb4\sl-263\slmult0 \up0 \expndtw-2\charsc
alex100 \ul0\nosupersub\cf5\f6\fs22 Monopoly:\ul0\nosupersub\cf1\f2\fs22 By red
ucing his sales, a monopolist can drive up the price of his good. \up0 \expndtw4\charscalex100 His sales will fall but his profits will rise. Consumption and p
roduction are less than \up0 \expndtw-3\charscalex100 the efficient amount, caus
ing a deadweight loss in welfare.\par\pard\ql \li3401\sb0\sl-264\slmult0 \par\pa
rd\ql \li20\ri943\sb1\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupers
ub\cf5\f6\fs22 Public goods:\ul0\nosupersub\cf1\f2\fs22 Some goods cannot be su
pplied by markets. If you refuse to pay for \up0 \expndtw-2\charscalex100 a new
coat, the seller will refuse to supply you. If you refuse to pay for national \u
p0 \expndtw-3\charscalex100 defence, the \u8220?good\u8221? cannot easily be wit
hheld. You might be tempted to let others \up0 \expndtw-2\charscalex100 pay. The
same reasoning applies to other \u8220?non-excludable\u8221? goods such as law
and \up0 \expndtw-2\charscalex100 order, clean air, and so on. Since private sel
lers cannot expect to recover the costs \up0 \expndtw-5\charscalex100 of produci
ng such goods, they will fail to supply them.\par\pard\qj \li3401\sb0\sl-263\slm
ult0 \par\pard\qj \li20\ri1109\sb2\sl-263\slmult0 \up0 \expndtw-2\charscalex100
\ul0\nosupersub\cf5\f6\fs22 Externalities:\ul0\nosupersub\cf1\f2\fs22 Making so
me goods causes pollution: the cost is borne by people \up0 \expndtw-3\charscale
x100 with no say in deciding how much to produce. Consuming some goods (educatio
n, \up0 \expndtw-3\charscalex100 anti-lock brakes) spreads benefits beyond the b
uyer; again, this will be ignored
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no2\colw1984\colsr160\ql \li1167\sb0\sl-253\slmult0 \par\pard\ql \li1167\sb184\s
l-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf1\f2\fs22 when the
market decides how much to produce. In the case of \u8220?good\u8221? externali
ties,\par\pard\ql \li1167\sb11\sl-253\slmult0 \up0 \expndtw-4\charscalex100 mark
ets will supply too little; in the case of \u8220?bads\u8221?, too much.\par\par
d\ql \li1167\sb0\sl-264\slmult0 \par\pard\ql \li1167\ri1300\sb2\sl-264\slmult0 \
up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Information:\ul0\nosupe
rsub\cf1\f2\fs22 In some ways a special kind of externality, this deserves to b

e \up0 \expndtw-2\charscalex100 mentioned separately because of the emphasis pla
ced upon it in recent economic \up0 \expndtw-2\charscalex100 theory. To see why
information matters, consider the market for used cars. A \up0 \expndtw-3\charsc
alex100 buyer, lacking reliable information, may see the price as providing clue
s about a \up0 \expndtw-3\charscalex100 car\u8217?s condition. This puts sellers
in a quandary: if they cut prices, they may only \up0 \expndtw-3\charscalex100
convince people that their cars are rubbish.\par\pard\ql \li1167\sb0\sl-264\slmu
lt0 \par\pard\ql \li1167\ri1164\sb1\sl-264\slmult0 \up0 \expndtw-2\charscalex100
The labour market, many economists believe, is another such \u8216?market for l
emons\u8217?. \up0 \expndtw-4\charscalex100 This may help to explain why it is s
o difficult for the unemployed to price \line \up0 \expndtw-4\charscalex100 them
selves into work.\par\pard\ql \li1167\sb0\sl-264\slmult0 \par\pard\ql \li1167\ri
1028\sb1\sl-264\slmult0 \up0 \expndtw-2\charscalex100 When markets fail, there i
s a case for intervention. But two questions need to be \up0 \expndtw-1\charscal
ex100 answered first. How much does market failure matter in practice? And can \
line \up0 \expndtw-2\charscalex100 governments put the failure right? Markets of
ten correct their own failures. In other \up0 \expndtw-1\charscalex100 cases, an
apparent failure does nobody any harm. In general, market failure matters \up0
\expndtw-3\charscalex100 less in practice than is often supposed.\par\pard\ql \l
i1167\sb0\sl-263\slmult0 \par\pard\ql \li1167\ri1255\sb2\sl-263\slmult0 \up0 \ex
pndtw-3\charscalex100 Monopoly, for instance, may seem to preclude an efficient
market. This is wrong. \line \up0 \expndtw-2\charscalex100 The mere fact of mono
poly does not establish that any economic harm is being \line \up0 \expndtw-3\ch
arscalex100 done. If a monopoly is protected from would-be competitors by high b
arriers to\par\pard\ql \li1167\ri1029\sb1\sl-263\slmult0 \up0 \expndtw-1\charsca
lex100 entry, it can raise its prices and earn excessive profits. If that happen
s, the \line \up0 \expndtw-3\charscalex100 monopoly is undeniably harmful. But i
f barriers to entry are low, lack of actual (as \up0 \expndtw-3\charscalex100 op
posed to potential) competitors does not prove that the monopoly is damaging: th
e \up0 \expndtw-2\charscalex100 threat of competition may be enough to make it b
ehave as though it were a \line \up0 \expndtw-2\charscalex100 competitive firm.
Many economists would accept that Microsoft, for instance, is a \up0 \expndtw-1\
charscalex100 near-monopolist in some parts of the personal-computer software bu
siness-yet \line \up0 \expndtw-2\charscalex100 would argue that the firm is doin
g no harm to consumers because its markets \line \up0 \expndtw-2\charscalex100 r
emain highly contestable. Because of that persistent threat of competition, the
\line \up0 \expndtw-2\charscalex100 company prices its products keenly. In this
and in other ways it behaves as though it \up0 \expndtw-3\charscalex100 were a s
maller firm in a competitive market.\par\pard\ql \li1167\ri1029\sb169\sl-264\slm
ult0 \up0 \expndtw-3\charscalex100 Even on economic grounds (never mind other co
nsiderations), there is no tidy \line \up0 \expndtw-1\charscalex100 answer to th
e question of where the boundary between state i.e. governments and \line \up0 \
expndtw-4\charscalex100 market should lie. Markets do fail because of monopoly,
public goods, externalities, \line \up0 \expndtw-3\charscalex100 lack of informa
tion and for other reasons. But, more than critics allow, markets find \line \up
0 \expndtw-1\charscalex100 ways to mitigate the harm-and that is a task at which
governments have often been \line \up0 \expndtw-3\charscalex100 strikingly unsu
ccessful. All in all, a strong presumption in favour of markets seems \line \up0
\expndtw-1\charscalex100 wise. This is not because classical economic theory sa
ys so, but because \line \up0 \expndtw0\charscalex100 experience seems to agree.
And as stated above, the real world seems to be \line \up0 \expndtw-3\charscale
x100 moving in the direction of placing more reliance on markets than on governm
ents.\par\pard\ql \li1167\sb0\sl-322\slmult0 \par\pard\ql \li1167\sb239\sl-322\s
lmult0\tx1792 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf6\f7\fs28 1.3\tab \
up0 \expndtw-1\charscalex100 SCOPE OF MANAGERIAL ECONOMICS\par\pard\ql \li1167\r
i1058\sb242\sl-264\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\
fs22 From the point of view of a firm, managerial economics, may be defined as \
up0 \expndtw-2\charscalex100 economics applied to \u8220?problems of choice\u822
1? or alternatives and allocation of scarce \up0 \expndtw-2\charscalex100 resour
ces by the firms. Thus managerial economics is the study of allocation of \up0 \
expndtw-2\charscalex100 resources available to a firm or a unit of management am
ong the activities of that \up0 \expndtw-3\charscalex100 unit. Managerial econom
ics is concerned with the application of economic concepts \up0 \expndtw-3\chars
calex100 and analysis to the problem of formulating rational managerial decision
s. There are \up0 \expndtw-5\charscalex100 four groups of problem in both decisi
ons-making and forward planning.\par\pard\ql \li1167\sb0\sl-263\slmult0 \par\par
d\ql \li1167\ri1149\sb2\sl-263\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosuper
sub\cf5\f6\fs22 Resource Allocation:\ul0\nosupersub\cf1\f2\fs22 Scare resources
have to be used with utmost efficiency to \up0 \expndtw-4\charscalex100 get opt
imal results. These include production programming and problem of \up0 \expndtw2\charscalex100 transportation etc. How does resource allocation take place with
in a firm?\par\pard\column \ql \li9776\sb0\sl-184\slmult0 \par\pard\ql \li9776\s
b0\sl-184\slmult0 \par\pard\ql \li20\sb78\sl-184\slmult0 \up0 \expndtw0\charscal
ex110 \ul0\nosupersub\cf2\f3\fs16 Scope of Managerial\par\pard\ql \li800\sb8\sl184\slmult0 \up0 \expndtw0\charscalex107 Economics\par\pard\ql \li11254\sb0\sl-2
53\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl
-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\
sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb
0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\
sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li1125
254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li
11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \
li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql
\li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\
ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\par
d\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\p
ard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par
\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \p
ar\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0
\par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult
0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmu
lt0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\sl
mult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\
slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-25
3\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\s
l-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0
\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\s
b0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254
\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li112
1254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \l
i11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql
\li11254\sb0\sl-253\slmult0 \par\pard\ql \li1498\sb66\sl-253\slmult0 \up0 \expnd
tw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs22 5
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184\sl-253\slmult0 \up0 \expndtw-1\charscalex100 Naturally, a manager decides ho
w to allocate resources to their respective uses\par\pard\qj \li20\ri959\sb3\sl263\slmult0 \up0 \expndtw-3\charscalex100 within the firm, while as stated above
, the resource allocation decision outside the \up0 \expndtw-3\charscalex100 fir
m is primarily done through the market. Thus, one important insight you can draw
\up0 \expndtw-2\charscalex100 about the firm is that within it resources are gu
ided by the manager in a manner\par\pard\ql \li20\sb10\sl-253\slmult0 \up0 \expn
dtw-3\charscalex100 that achieves the objectives of the firm. More will be said
about this in Unit 2.\par\pard\ql \li3401\sb0\sl-263\slmult0 \par\pard\ql \li20\
ri1065\sb4\sl-263\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\f
s22 Inventory and queuing problem:\ul0\nosupersub\cf1\f2\fs22 Inventory problem
s involve decisions about \line \up0 \expndtw-3\charscalex100 holding of optimal
levels of stocks of raw materials and finished goods over a \line \up0 \expndtw
-3\charscalex100 period. These decisions are taken by considering demand and sup
ply conditions. \line \up0 \expndtw-4\charscalex100 Queuing problems involve dec
isions about installation of additional machines or \line \up0 \expndtw-3\charsc
alex100 hiring of extra labour in order to balance the business lost by not unde
rtaking these \line \up0 \expndtw-5\charscalex100 activities.\par\pard\qj \li340
1\sb0\sl-263\slmult0 \par\pard\qj \li20\ri1439\sb2\sl-263\slmult0 \up0 \expndtw2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Pricing Problem:\ul0\nosupersub\cf1\
f2\fs22 Fixing prices for the products of the firm is an important \up0 \expndt
w-4\charscalex100 decision-making process. Pricing problems involve decisions re
garding various \up0 \expndtw-3\charscalex100 methods of prices to be adopted.\p
ar\pard\qj \li3401\sb0\sl-263\slmult0 \par\pard\qj \li20\ri973\sb2\sl-263\slmult
0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Investment Problem:\
ul0\nosupersub\cf1\f2\fs22 Forward planning involves investment problems. These
are \up0 \expndtw-2\charscalex100 problems of allocating scarce resources over
time. For example, investing in new \up0 \expndtw-3\charscalex100 plants, how mu
ch to invest, sources of funds, etc.\par\pard\qj \li3401\sb0\sl-263\slmult0 \par

\pard\qj \li20\ri1275\sb2\sl-263\slmult0 \up0 \expndtw-3\charscalex100 Study of
managerial economics essentially involves the analysis of certain major \up0 \ex
pndtw-6\charscalex100 subjects like:\par\pard\ql \li303\sb96\sl-253\slmult0 \up0
\expndtw-4\charscalex100 The business firm and its objectives\par\pard\ql \li30
3\sb96\sl-253\slmult0 \up0 \expndtw-4\charscalex100 Demand analysis, estimation
and forecasting\par\pard\ql \li303\sb96\sl-253\slmult0 \up0 \expndtw-4\charscale
x100 Production and Cost analysis\par\pard\ql \li303\sb95\sl-253\slmult0 \up0 \e
xpndtw-5\charscalex100 Pricing theory and policies\par\pard\ql \li303\sb96\sl-25
3\slmult0 \up0 \expndtw-3\charscalex100 Profit analysis with special reference t
o break-even point\par\pard\ql \li303\sb96\sl-253\slmult0 \up0 \expndtw-5\charsc
alex100 Capital budgeting for investment decisions\par\pard\ql \li303\sb97\sl-25
3\slmult0 \up0 \expndtw-6\charscalex100 Competition.\par\pard\qj \li3401\sb0\sl264\slmult0 \par\pard\qj \li20\ri1079\sb2\sl-264\slmult0 \up0 \expndtw-2\charsca
lex100 Demand analysis and forecasting help a manager in the earliest stage in c
hoosing \up0 \expndtw-3\charscalex100 the product and in planning output levels.
A study of demand elasticity goes a long \up0 \expndtw-2\charscalex100 way in h
elping the firm to fix prices for its products. The theory of cost also forms \u
p0 \expndtw-2\charscalex100 an essential part of this subject. Estimation is nec
essary for making output\par\pard\qj \li20\ri1108\sb1\sl-263\slmult0 \up0 \expnd
tw-3\charscalex100 variations with fixed plants or for the purpose of new invest
ments in the same line \up0 \expndtw-3\charscalex100 of production or in a diffe
rent venture. The firm works for profits and optimal or \up0 \expndtw-2\charscal
ex100 near maximum profits depend upon accurate price decisions. Theories regard
ing \up0 \expndtw-3\charscalex100 price determination under various market condi
tions enable the firm to solve the \up0 \expndtw-4\charscalex100 price fixation
problems. Control of costs, proper pricing policies, break-even\par\pard\ql \li2
0\ri1124\sb1\sl-263\slmult0 \up0 \expndtw-3\charscalex100 analysis, alternative
profit policies are some of the important techniques in profit \up0 \expndtw-3\c
harscalex100 planning for the firm which has to work under conditions of uncerta
inty. Thus \up0 \expndtw-3\charscalex100 managerial economics tries to find out
which course is likely to be the best for the \up0 \expndtw-4\charscalex100 firm
under a given set of conditions.\par\pard\ql \li3401\sb0\sl-322\slmult0 \par\pa
rd\ql \li20\sb238\sl-322\slmult0\tx655 \up0 \expndtw0\charscalex104 \ul0\nosuper
sub\cf6\f7\fs28 1.4\tab \up0 \expndtw-1\charscalex100 APPROPRIATE DEFINITIONS\pa
r\pard\ql \li20\ri1064\sb242\sl-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\n
osupersub\cf1\f2\fs22 According to McNair and Meriam, \u8220?Managerial economic
s is the use of economic \line \up0 \expndtw-2\charscalex100 modes of thought to
analyse business situations.\u8221? According to Prof. Evan J \line \up0 \expnd
tw-3\charscalex100 Douglas, \u8216?Managerial economics\u8217? is concerned with
the application of economic \line \up0 \expndtw-4\charscalex100 principles and
methodologies to the decision making process within the firm or \line \up0 \expn
dtw-3\charscalex100 organisation under the conditions of uncertainty\u8221?. Spe
ncer and Siegelman define it \line \up0 \expndtw-2\charscalex100 as \u8220?The i
ntegration of economic theory with business practices for the purpose of \line \
up0 \expndtw-3\charscalex100 facilitating decision making and forward planning b
y management.\u8221? According to
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shpbxpage\shpbypage\shpwr3\shpwrk0\shpfblwtxt1\shpz244\shplid1{\sp{\sn shapeType
}{\sv 20}}{\sp{\sn fBehindDocument}{\sv 1}}{\sp{\sn lineColor}{\sv 2039586}}{\sp
{\sn lineWidth}{\sv 7248}}
no2\colw1984\colsr160\ql \li1167\sb0\sl-253\slmult0 \par\pard\ql \li1167\sb184\s
l-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs22 Hailston
es and Rothwel, \u8220?Managerial economics is the application of economic\par\p

ard\qj \li1167\ri1088\sb3\sl-263\slmult0 \up0 \expndtw-3\charscalex100 theory an
d analysis to practice of business firms and other institutions.\u8221? A common
\up0 \expndtw-3\charscalex100 thread runs through all these descriptions of man
agerial economics which is using a \up0 \expndtw-3\charscalex100 framework of an
alysis to arrive at informed decisions to maximize the firm\u8217?s\par\pard\ql
\li1167\ri1223\sb1\sl-264\slmult0 \up0 \expndtw-3\charscalex100 objectives, ofte
n in an environment of uncertainty. It is important to recognize that \up0 \expn
dtw-3\charscalex100 decisions taken while employing a framework of analysis are
likely to be more \up0 \expndtw-3\charscalex100 successful than decisions that a
re knee jerk or gut feel decisions.\par\pard\ql \li1167\sb181\sl-253\slmult0 \up
0 \expndtw0\charscalex101 \ul0\nosupersub\cf5\f6\fs22 Activity 1\par\pard\qj \li
1167\ri1421\sb201\sl-263\slmult0\tx1437 \up0 \expndtw-2\charscalex100 \ul0\nosup
ersub\cf1\f2\fs22 a) Development of managerial economics is the result of close
interrelationship \line\tab \up0 \expndtw-2\charscalex100 between management and
economics. Discuss.\par\pard\ql \li1167\sb0\sl-253\slmult0 \par\pard\ql \li1167
\sb0\sl-253\slmult0 \par\pard\ql \li1167\sb237\sl-253\slmult0 \up0 \expndtw-2\ch
arscalex100 b) Which statement is true of the basic economic problem?\par\pard\q
l \li1568\sb96\sl-253\slmult0 \up0 \expndtw-1\charscalex100 (i) The problem wil
l exist as long as resources are limited and desires are\par\pard\ql \li1933\sb1
1\sl-253\slmult0 \up0 \expndtw-9\charscalex100 unlimited.\par\pard\ql \li1524\sb
96\sl-253\slmult0 \up0 \expndtw-4\charscalex100 (ii) The problem exists only in
less developed countries.\par\pard\ql \li1478\sb95\sl-253\slmult0 \up0 \expndtw
-4\charscalex100 (iii) The problem will disappear as production expands.\par\pa
rd\ql \li1464\sb96\sl-253\slmult0 \up0 \expndtw-2\charscalex100 (iv) The advanc
ement of technology will cause the problem to disappear.\par\pard\ql \li1167\sb0
\sl-253\slmult0 \par\pard\ql \li1167\sb108\sl-253\slmult0 \up0 \expndtw-3\charsc
alex100 c) Why is decision making by any management truly economic in nature?\pa
r\pard\ql \li1167\sb0\sl-322\slmult0 \par\pard\ql \li1167\sb0\sl-322\slmult0 \pa
r\pard\ql \li1167\sb24\sl-322\slmult0\tx1792 \up0 \expndtw0\charscalex104 \ul0\n
osupersub\cf6\f7\fs28 1.5\tab \up0 \expndtw-1\charscalex100 MANAGERIAL ECONOMICS
AND OTHER\par\pard\ql \li1797\sb14\sl-322\slmult0 \up0 \expndtw-1\charscalex100
DISCIPLINES\par\pard\ql \li1167\sb251\sl-253\slmult0 \up0 \expndtw-3\charscalex
100 \ul0\nosupersub\cf1\f2\fs22 Managerial economics is linked with various othe
r fields of study like-\par\pard\qj \li1167\sb0\sl-264\slmult0 \par\pard\qj \li1
167\ri1119\sb2\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf5\
f6\fs22 Microeconomic Theory:\ul0\nosupersub\cf1\f2\fs22 As stated in the intro
duction, the roots of managerial \up0 \expndtw-3\charscalex100 economics spring
from micro-economic theory. Price theory, demand concepts and \up0 \expndtw-1\ch
arscalex100 theories of market structure are few elements of micro economics use
d by\par\pard\qj \li1167\ri1478\sb1\sl-264\slmult0 \up0 \expndtw-3\charscalex100
managerial economists. It has an applied bias as it applies economic theories i
n \up0 \expndtw-3\charscalex100 order to solve real world problems of enterprise
s.\par\pard\ql \li1167\sb0\sl-263\slmult0 \par\pard\ql \li1167\ri1074\sb2\sl-263
\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Macroeconomic
Theory:\ul0\nosupersub\cf1\f2\fs22 This field has little relevance for manager
ial economics \up0 \expndtw-3\charscalex100 but at least one part of it is incor
porated in managerial economics i.e. national \line \up0 \expndtw-3\charscalex10
0 income forecasting. The latter could be an important aid to business condition
\line \up0 \expndtw-3\charscalex100 analysis, which in turn could be a valuable
input for forecasting the demand for \line \up0 \expndtw-4\charscalex100 specif
ic product groups.\par\pard\ql \li1167\sb0\sl-263\slmult0 \par\pard\ql \li1167\r
i1193\sb2\sl-263\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf5\f6\fs
22 Operations Research:\ul0\nosupersub\cf1\f2\fs22 This field is used in manage
rial economics to find out the \line \up0 \expndtw-4\charscalex100 best of all p
ossibilities. Linear programming is a great aid in decision making in \line \up0
\expndtw-4\charscalex100 business and industry as it can help in solving proble

ms like determination of \line \up0 \expndtw-5\charscalex100 facilities on machi
ne scheduling, distribution of commodities and optimum product \line \up0 \expnd
tw-3\charscalex100 mix etc.\par\pard\column \ql \li9776\sb0\sl-184\slmult0 \par\
pard\ql \li9776\sb0\sl-184\slmult0 \par\pard\ql \li20\sb78\sl-184\slmult0 \up0 \
expndtw0\charscalex110 \ul0\nosupersub\cf2\f3\fs16 Scope of Managerial\par\pard\
ql \li800\sb8\sl-184\slmult0 \up0 \expndtw0\charscalex107 Economics\par\pard\ql
\li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\q
l \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard
\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pa
rd\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\
pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \pa
r\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \
par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0
\par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmul
t0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slm
ult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\s
lmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253
\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-2
53\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl
-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\
sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb
0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\
sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li1125
254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li
11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \
li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql
\li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\
ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\par
d\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\p
ard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par
\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \p
ar\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult0
\par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmult
0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li11254\sb0\sl-253\slmu
lt0 \par\pard\ql \li11254\sb0\sl-253\slmult0 \par\pard\ql \li1498\sb66\sl-253\sl
mult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2\fs22 7
}}

184\sl-253\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Theo
ry of Decision Making:\ul0\nosupersub\cf1\f2\fs22 Decision theory has been deve
loped to deal with\par\pard\qj \li20\ri1002\sb3\sl-263\slmult0 \up0 \expndtw-4\c
harscalex100 problems of choice or decision making under uncertainty, where the
applicability of \up0 \expndtw-5\charscalex100 figures required for the utility
calculus are not available. Economic theory is based on \up0 \expndtw-3\charscal
ex100 assumptions of a single goal whereas decision theory breaks new grounds by
\par\pard\qj \li20\ri1035\sb1\sl-263\slmult0 \up0 \expndtw-4\charscalex100 recog
nizing multiplicity of goals and persuasiveness of uncertainty in the real world
\up0 \expndtw-2\charscalex100 of management.\par\pard\ql \li3401\sb0\sl-263\slm
ult0 \par\pard\ql \li20\ri1004\sb2\sl-263\slmult0 \up0 \expndtw-3\charscalex100
\ul0\nosupersub\cf5\f6\fs22 Statistics: \ul0\nosupersub\cf1\f2\fs22 Statistics h
elps in empirical testing of theory. With its help, better \up0 \expndtw-3\chars
calex100 decisions relating to demand and cost functions, production, sales or d
istribution are \up0 \expndtw-3\charscalex100 taken. Managerial economics is hea
vily dependent on statistical methods.\par\pard\ql \li3401\sb0\sl-264\slmult0 \p
ar\pard\ql \li20\ri1528\sb1\sl-264\slmult0 \up0 \expndtw-2\charscalex100 \ul0\no
supersub\cf5\f6\fs22 Management Theory and Accounting:\ul0\nosupersub\cf1\f2\fs2
2 Maximisation of profit has been \line \up0 \expndtw-2\charscalex100 regarded
as a central concept in the theory of the firm in microeconomics. In \line \up0
\expndtw-2\charscalex100 recent years, organisation theorists have talked about
\u8220?satisficing\u8221? instead of\par\pard\qj \li20\ri1304\sb1\sl-263\slmult0
\up0 \expndtw-2\charscalex100 \u8220?maximising\u8221? as an objective of the e
nterprise. Accounting data and statements \up0 \expndtw-2\charscalex100 constitu
te the language of business. In fact the link is so close that \u8220?managerial
\up0 \expndtw-2\charscalex100 accounting\u8221? has developed as a separate and
specialized field in itself.\par\pard\ql \li3401\sb0\sl-322\slmult0 \par\pard\q
l \li20\sb95\sl-322\slmult0\tx655 \up0 \expndtw0\charscalex104 \ul0\nosupersub\c
f6\f7\fs28 1.6\tab \up0 \expndtw-3\charscalex100 ECONOMIC ANALYSIS\par\pard\ql \
li20\ri1079\sb242\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\c
f1\f2\fs22 Economic activity is the constant effort to match ends to means becau
se of \line \up0 \expndtw-3\charscalex100 scarcity of resources. The optimal eco
nomic activity is to maximise the attainment \up0 \expndtw-2\charscalex100 of en
ds, the means and their scarcities or to minimise the use of resources, given \u
p0 \expndtw-4\charscalex100 the ends and their priorities.\par\pard\qj \li20\ri1
185\sb169\sl-264\slmult0 \up0 \expndtw-3\charscalex100 Decision making by manage
ment is truly economic in nature because it involves \up0 \expndtw-2\charscalex1
00 choices among a set of alternatives - alternative courses of action. The opti

mal \up0 \expndtw-3\charscalex100 decision making is an act of optimal economic
choice, considering objectives and \up0 \expndtw-3\charscalex100 constraints. Th
is justifies an evaluation of managerial decisions through concepts, \up0 \expnd
tw-3\charscalex100 precepts, tools and techniques of economic analysis of the fo
llowing types:\par\pard\ql \li3401\sb0\sl-264\slmult0 \par\pard\ql \li20\ri1137\
sb1\sl-264\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Mic
ro and Macro Analysis: \ul0\nosupersub\cf1\f2\fs22 In micro-analysis the problem
of choice is focused \line \up0 \expndtw-3\charscalex100 on single individual e
ntities like a consumer, a producer, a market etc. Macro \line \up0 \expndtw-4\c
harscalex100 analysis deals with the problem in totality like national income, g
eneral price level \line \up0 \expndtw0\charscalex103 etc.\par\pard\ql \li3401\s
b0\sl-264\slmult0 \par\pard\ql \li20\ri1078\sb1\sl-264\slmult0 \up0 \expndtw-1\c
harscalex100 \ul0\nosupersub\cf5\f6\fs22 Partial and General Equilibrium Analysi
s: \ul0\nosupersub\cf1\f2\fs22 To attain the state of stable \line \up0 \expndtw
-3\charscalex100 equilibrium, the economic problem may be analysed part by part
- one at a time -\line \up0 \expndtw-4\charscalex100 assuming \u8220?other thing
s remaining the same.\u8221? This is partial equilibrium analysis. In \line \up0
\expndtw-4\charscalex100 general equilibrium analysis the assumption of \u8220?
given\u8221? or \u8220?other things remaining \line \up0 \expndtw-2\charscalex10
0 equal\u8221? may be relaxed and interdependence or interactions among variable
s may \line \up0 \expndtw-4\charscalex100 be allowed.\par\pard\qj \li3401\sb0\sl
-263\slmult0 \par\pard\qj \li20\ri1079\sb2\sl-263\slmult0 \up0 \expndtw-1\charsc
alex100 \ul0\nosupersub\cf5\f6\fs22 Static, Comparative Static and Dynamic Analy
sis: \ul0\nosupersub\cf1\f2\fs22 This is in reference to time \up0 \expndtw-4\ch
arscalex100 dimension. A problem may be analysed\par\pard\ql \li20\sb95\sl-253\s
lmult0 \up0 \expndtw-3\charscalex100 - allowing no change at a point of time (
static)\par\pard\qj \li20\ri2175\sb16\sl-349\slmult0 \up0 \expndtw-2\charscalex1
00 - allowing once for all change at a point of time (comparative static) \up0
\expndtw-2\charscalex100 - allowing successive changes over a period of time
(dynamic).\par\pard\ql \li20\ri989\sb250\sl-264\slmult0 \up0 \expndtw-1\charscal
ex100 \ul0\nosupersub\cf5\f6\fs22 Positive and Normative Analysis:\ul0\nosupersu
b\cf1\f2\fs22 In positive economic analysis, the problem is \line \up0 \expndtw
-3\charscalex100 analyzed in objective terms based on principles and theories. I
n normative \line \up0 \expndtw-3\charscalex100 economic analysis, the problem i
s analyzed based on value judgement (norms). In \line \up0 \expndtw-3\charscalex
100 simple terms, positive analysis is \u8216?what it is\u8217? and normative an
alysis is \u8216?what it \line \up0 \expndtw-2\charscalex100 should be.\u8217? F
or example, CEOs in private Indian enterprises earn 15 times as much \line \up0
\expndtw-2\charscalex100 as the lowest paid employee is a positive statement, a
description of what is. A \line \up0 \expndtw-2\charscalex100 normative statemen
t would be that CEOs should be paid 4-5 times the lowest paid \line \up0 \expndt
w-4\charscalex100 employee.
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g9}{\bkmkend Pg9}\par\pard\li1167\sb0\sl-253\slmult0\par\pard\li1167\sb178\sl-25
3\slmult0\fi0\tx9776 \dn3 \expndtw0\charscalex107 \ul0\nosupersub\cf5\f6\fs22 Ac
tivity 2\tab \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf2\f3\fs16 Scope of M
anagerial\par\pard\li1167\sb1\sl-162\slmult0\fi9388 \up0 \expndtw-1\charscalex10
0 Economics\par\pard\li1167\sb81\sl-253\slmult0\fi0\tx1450 \up0 \expndtw-2\chars
calex100 \ul0\nosupersub\cf1\f2\fs22 a)\tab \up0 \expndtw-2\charscalex100 The ma
jor groups of problems in decision making are:\par\pard\li1167\sb97\sl-253\slmul
t0\fi283 \up0 \expndtw-2\charscalex100 (i)\par\pard\li1167\sb96\sl-253\slmult0\f

i283 \up0 \expndtw-2\charscalex100 (ii)\par\pard\li1167\sb96\sl-253\slmult0\fi28
3 \up0 \expndtw-2\charscalex100 (iii)\par\pard\li1167\sb95\sl-253\slmult0\fi283
\up0 \expndtw-2\charscalex100 (iv)\par\pard\li1167\sb0\sl-253\slmult0\par\pard\l
i1167\sb107\sl-253\slmult0\fi0\tx1450 \up0 \expndtw-4\charscalex100 b)\tab \up0
\expndtw-2\charscalex100 The 3 choice problems of an economy are:\par\pard\li116
7\sb97\sl-253\slmult0\fi283 \up0 \expndtw-2\charscalex100 (i)\par\pard\li1167\sb
96\sl-253\slmult0\fi283 \up0 \expndtw-2\charscalex100 (ii)\par\pard\li1167\sb96\
sl-253\slmult0\fi283 \up0 \expndtw-2\charscalex100 (iii)\par\pard\li1167\sb96\sl
-253\slmult0\fi283 \up0 \expndtw-2\charscalex100 The problems arise due to...\pa
r\pard\li1167\sb0\sl-253\slmult0\par\pard\li1167\sb106\sl-253\slmult0\fi0\tx1450
\up0 \expndtw-2\charscalex100 c)\tab \up0 \expndtw-1\charscalex100 Name the kin
d of economic analysis that is appropriate for each of the following:\par\pard\l
i1167\sb96\sl-253\slmult0\fi283 \up0 \expndtw-2\charscalex100 (i) The ONGC has
expansion plans ...\par\pard\ql \li1450\sb84\sl-253\slmult0 \up0 \expndtw0\chars
calex105 (ii) The NTC is making loss ... \par\pard\ql \li1450\sb107\sl-253\slmu
lt0 \up0 \expndtw0\charscalex102 (iii) The textile industry is facing recession
... \par\pard\ql \li1450\sb87\sl-253\slmult0 \up0 \expndtw0\charscalex101 (iv) T
he population growth in India is alarming ... \par\pard\ql \li1450\sb107\sl-253\
slmult0 \up0 \expndtw0\charscalex103 (v) There is a bearish trend in the stock
market ... \par\pard\ql \li1167\sb0\sl-322\slmult0 \par\pard\ql\li1167\sb108\sl322\slmult0\tx1797 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf6\f7\fs28 1.7
\tab \up0 \expndtw-4\charscalex100 BASIC CHARACTERISTICS: DECISION-MAKING \par\p
ard\qj \li1167\ri3583\sb250\sl-260\slmult0 \up0 \expndtw-2\charscalex100 \ul0\no
supersub\cf1\f2\fs22 Managerial Economics serves as \u8216?a link between tradit
ional economics and the \up0 \expndtw-4\charscalex100 decision making sciences\u
8217? for business decision making. \par\pard\qj \li1167\ri3275\sb244\sl-280\slm
ult0 \up0 \expndtw-2\charscalex100 The best way to get acquainted with manageria
l economics and decision making is \up0 \expndtw-4\charscalex100 to come face to
face with real world decision problems. \par\pard\ql \li1167\sb164\sl-276\slmul
t0 \up0 \expndtw-7\charscalex100 \ul0\nosupersub\cf4\f5\fs24 Tata\u8217?s Vision
2000 \par\pard\ql \li1167\ri3567\sb169\sl-270\slmult0 \up0 \expndtw-3\charscale
x100 \ul0\nosupersub\cf1\f2\fs22 Presently there are about 87 firms in the Tata
empire. As many as 16 recorded \up0 \expndtw-3\charscalex100 losses in 1995-96.
The Tata\u8217?s companies that are in the limelight are TISCO, \up0 \expndtw-4\
charscalex100 TELCO, ACC, Tata Exports and Tata Chemicals. \par\pard\li1167\sb0\
sl-253\slmult0\par\pard\li1167\sb23\sl-253\slmult0\fi0\tx3327\tx4047 \up0 \expnd
tw-4\charscalex100 Contribution of bottom\tab \up0 \expndtw-4\charscalex100 -\ta
b \up0 \expndtw-4\charscalex100 In terms of turnover : 35% of total of group.\pa
r\pard\li1167\sb11\sl-253\slmult0\fi0\tx3327\tx4047 \up0 \expndtw-4\charscalex10
0 20 companies\tab \up0 \expndtw-4\charscalex100 -\tab \up0 \expndtw-4\charscale
x100 In terms of net profit : 0.2% of total sales of group.\par\pard\li1167\sb11
\sl-253\slmult0\fi2160\tx4047 \up0 \expndtw-3\charscalex100 \u8211?\tab \up0 \ex
pndtw-3\charscalex100 In terms of assets & net worth <1% of total sales of\par\p
ard\li1167\sb11\sl-253\slmult0\fi2879 \up0 \expndtw-3\charscalex100 group.\par\p
ard\li1167\sb11\sl-253\slmult0\fi0\tx3327\tx4047 \up0 \expndtw-3\charscalex100 T
he question is\tab \up0 \expndtw-3\charscalex100 -\tab \up0 \expndtw-3\charscale
x100 Do such non-performers warrant an existence or\par\pard\li1167\sb11\sl-253\
slmult0\fi2879 \up0 \expndtw-3\charscalex100 will the group be better off if it
could hive off the\par\pard\li1167\sb11\sl-253\slmult0\fi2879 \up0 \expndtw-3\ch
arscalex100 divisions, or else amalgamate them with other\par\pard\li1167\sb11\s
l-253\slmult0\fi2879 \up0 \expndtw-3\charscalex100 existing units.\par\pard\li11
67\sb11\sl-253\slmult0\fi0\tx3327\tx4047 \up0 \expndtw-3\charscalex100 On the th
ree basic\tab \up0 \expndtw-3\charscalex100 -\tab \up0 \expndtw-3\charscalex100
Last two companies are way below the group as a\par\pard\li1167\sb11\sl-253\slmu
lt0\fi0\tx4047 \up0 \expndtw-3\charscalex100 indications\tab \up0 \expndtw-3\cha
rscalex100 whole; providing 4.2% return on shareholders;\par\pard\li1167\sb11\sl
-253\slmult0\fi2879 \up0 \expndtw-4\charscalex100 1.9% return on capital employe
d.\par\pard\li1167\sb0\sl-253\slmult0\par\pard\li1167\sb22\sl-253\slmult0\fi0 \u
p0 \expndtw-3\charscalex100 Keeping these figures in mind, Tata\u8217?s planned
refocusing exercises like\par\pard\li1167\sb95\sl-253\slmult0\fi283\tx3329 \up0

\expndtw-4\charscalex100 Divestment\tab \up0 \expndtw-4\charscalex100 mer
gers\par\pard\li1167\sb96\sl-253\slmult0\fi283\tx3327\tx3659 \up0 \expndtw-4\cha
rscalex100 Amalgamations\tab \up0 \expndtw-4\charscalex100 -\tab \up0 \expndtw-4
\charscalex100 takeovers.\par\pard\qj \li1437\ri3884\sb86\sl-260\slmult0\fi13 \u
p0 \expndtw-3\charscalex100 To create a learner and suggestive group with an est
imated turnover of \up0 \expndtw-4\charscalex100 Rs. 1,10,000 crore by 2000. \
par\pard\ql \li11254\sb0\sl-187\slmult0 \up0 \expndtw-3\charscalex100 9
}}
g10}{\bkmkend Pg10}\par\pard\sect\sectd\sbknone\cols2\colno1\colw3241\colsr160\c
olno2\colw8359\colsr160\qj \li567\sb0\sl-191\slmult0 \par\pard\qj \li567\sb0\sl191\slmult0 \par\pard\qj \li567\ri510\sb59\sl-191\slmult0 \up0 \expndtw0\charsca
lex110 \ul0\nosupersub\cf2\f3\fs16 Introduction to Managerial \up0 \expndtw0\cha
rscalex107 Economics\par\pard\column \ql \li3684\sb0\sl-253\slmult0 \par\pard\ql
\li303\sb184\sl-253\slmult0 \up0 \expndtw-4\charscalex100 \ul0\nosupersub\cf1\f
2\fs22 From being production-led to being consumer and market-led; being up in t
op\par\pard\ql \li290\sb11\sl-253\slmult0 \up0 \expndtw-2\charscalex100 three in
every segment.\par\pard\qj \li3401\sb0\sl-264\slmult0 \par\pard\qj \li20\ri1049
\sb2\sl-264\slmult0 \up0 \expndtw-3\charscalex100 Tata\u8217?s \u8220?Vision 200
0\u8221? is a group. Why not give someone else a chance to run your \up0 \expndt
w-2\charscalex100 business more efficiently if you cannot do so? It makes better
economic as well as \up0 \expndtw-2\charscalex100 business sense. But then, the
ball is in the court of Tata\u8217?s. The What and How to \up0 \expndtw-4\chars
calex100 do is their prerogative.\par\pard\ql \li20\ri1364\sb194\sl-349\slmult0\
tx313\tx313 \up0 \expndtw-1\charscalex100 The basic characteristics of manageria
l economics can now be enumerated as: \line\tab \up0 \expndtw-3\charscalex100 It
is concerned with \u8220?decision making of an economic nature.\u8221? \line \t
ab \up0 \expndtw-3\charscalex100 It is \u8220?micro-economic\u8221? in character
.\par\pard\qj \li290\ri1185\sb72\sl-263\slmult0\fi13 \up0 \expndtw-3\charscalex1
00 It largely uses that body of economic concepts and principles, which is known
\up0 \expndtw-2\charscalex100 as \u8220?theory of the firm.\u8221?\par\pard\ql
\li303\sb94\sl-253\slmult0 \up0 \expndtw-4\charscalex100 It is \u8220?goal orien
ted and prescriptive\u8221?\par\pard\qj \li290\ri975\sb87\sl-264\slmult0\fi13 \u
p0 \expndtw-3\charscalex100 Managerial economics is both \u8220?conceptual and m
etrical\u8221?. It includes theory with \up0 \expndtw-1\charscalex100 measuremen
t.\par\pard\ql \li2499\sb200\sl-230\slmult0 \up0 \expndtw-4\charscalex100 \ul0\n
osupersub\cf7\f8\fs20 Figure 1.2: Decision-Making\par\pard\ql \li6597\sb0\sl-230
\slmult0 \par\pard\ql \li3216\sb112\sl-230\slmult0 \up0 \expndtw-3\charscalex100
Decision-\par\pard\ql \li3260\sb10\sl-230\slmult0 \up0 \expndtw-7\charscalex100
Problem\par\pard\ql \li4336\sb0\sl-230\slmult0 \par\pard\ql \li4336\sb0\sl-230\
slmult0 \par\pard\ql \li955\sb162\sl-230\slmult0\tx3133\tx5123 \up0 \expndtw-8\c
harscalex96 Traditional\tab \up0 \expndtw-5\charscalex100 Managerial\tab \up0 \e
xpndtw0\charscalex106 \ul0\nosupersub\cf12\f13\fs18 Decision Sciences\par\pard\s
ect\sectd\sbknone\cols2\colno1\colw8211\colsr160\colno2\colw3389\colsr160\ql \li
4350\sb10\sl-230\slmult0\tx6541 \up0 \expndtw-7\charscalex100 \ul0\nosupersub\cf
7\f8\fs20 Economics\tab \up0 \expndtw-6\charscalex100 Economics\par\pard\ql \li6
347\sb0\sl-207\slmult0 \par\pard\ql \li6347\sb31\sl-207\slmult0 \up0 \expndtw-2\
charscalex100 \ul0\nosupersub\cf12\f13\fs18 Optimal Solution\par\pard\ql \li6557
\sb9\sl-207\slmult0 \up0 \expndtw0\charscalex104 to Business\par\pard\ql \li6640
\sb9\sl-207\slmult0 \up0 \expndtw0\charscalex100 Problems\par\pard\column \ql \l
i20\sb0\sl-162\slmult0 \up0 \expndtw-3\charscalex100 (Tools and Techniques\par\p

ard\ql \li402\sb1\sl-171\slmult0 \up0 \expndtw0\charscalex101 of Analysis) \par\
pard\sect\sectd\sbknone \ql \li3401\sb0\sl-253\slmult0 \par\pard\ql\li3401\sb0\s
l-253\slmult0 \par\pard\ql\li3401\sb143\sl-253\slmult0 \up0 \expndtw-3\charscale
x100 \ul0\nosupersub\cf1\f2\fs22 Managerial economics should be thought of as ap
plied microeconomics, which \par\pard\qj \li3401\ri1168\sb2\sl-260\slmult0 \up0
\expndtw-2\charscalex100 focuses on the behavior of the individual actors on the
economic stage; firms and \up0 \expndtw-9\charscalex100 individuals. \par\pard\
ql \li5693\sb0\sl-230\slmult0 \par\pard\ql\li5693\sb75\sl-230\slmult0 \up0 \expn
dtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs20 Figure 1.3: Basic Characteristic
s \par\pard\ql \li5739\sb0\sl-230\slmult0 \par\pard\ql\li5739\sb60\sl-230\slmult
0 \up0 \expndtw-5\charscalex100 Management Decision Problems\par\pard\sect\sectd
\sbknone\cols3\colno1\colw5544\colsr160\colno2\colw2834\colsr110\colno3\colw3122
\colsr160\ql \li3684\sb0\sl-230\slmult0 \par\pard\ql \li3684\sb0\sl-230\slmult0
\par\pard\ql \li3684\sb92\sl-230\slmult0 \up0 \expndtw-7\charscalex100 Economic
Theory\par\pard\ql \li3714\sb10\sl-230\slmult0 \up0 \expndtw-4\charscalex100 Mic
roeconomics\par\pard\ql \li3700\sb10\sl-230\slmult0 \up0 \expndtw-5\charscalex10
0 Macroeconomics\par\pard\ql \li567\sb0\sl-253\slmult0 \par\pard\ql \li567\sb0\s
lt0 \par\pard\ql \li567\sb92\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\n
osupersub\cf1\f2\fs22 10\par\pard\column \ql \li6138\sb0\sl-230\slmult0 \par\par
d\ql \li6138\sb0\sl-230\slmult0 \par\pard\ql \li6138\sb0\sl-230\slmult0 \par\par
d\ql \li6138\sb0\sl-230\slmult0 \par\pard\ql \li454\sb11\sl-230\slmult0 \up0 \ex
pndtw-6\charscalex100 \ul0\nosupersub\cf7\f8\fs20 Managerial Economics\par\pard\
ql \li20\sb10\sl-230\slmult0 \up0 \expndtw-7\charscalex100 Application of econom
ic theory &\par\pard\ql \li507\sb10\sl-230\slmult0 \up0 \expndtw-5\charscalex100
decision tools to solve\par\pard\ql \li154\sb10\sl-230\slmult0 \up0 \expndtw-5\
charscalex100 managerial decision problems\par\pard\ql \li5771\sb0\sl-230\slmult
0 \par\pard\ql \li5771\sb0\sl-230\slmult0 \par\pard\ql \li5771\sb0\sl-230\slmult
0 \par\pard\ql \li87\sb188\sl-230\slmult0 \up0 \expndtw-6\charscalex100 Optimal
Solution to Managerial\par\pard\ql \li613\sb10\sl-230\slmult0 \up0 \expndtw-4\ch
arscalex100 Decision Problems\par\pard\column \ql \li8921\sb0\sl-230\slmult0 \pa
r\pard\ql \li8921\sb0\sl-230\slmult0 \par\pard\ql \li303\sb208\sl-230\slmult0 \u
p0 \expndtw-1\charscalex100 Decision Science\par\pard\ql \li20\sb10\sl-230\slmul
t0 \up0 \expndtw-9\charscalex97 Mathematical Economics
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\sl-322\slmult0\tx1792 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf6\f7\fs28
1.8\tab \up0 \expndtw-4\charscalex100 SUMMARY\par\pard\column \ql \li9776\sb0\sl
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nagerial\par\pard\ql \li800\sb8\sl-184\slmult0 \up0 \expndtw0\charscalex107 Econ
omics \par\pard\sect\sectd\sbknone \ql \li1167\sb201\sl-253\slmult0 \up0 \expndt
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ces and allocation of scarce resources by the \line \up0 \expndtw-2\charscalex10
0 firms. It refers to the application of economic theory and the tools of analys
is of \line \up0 \expndtw-2\charscalex100 decision science to examine how an org
anisation can achieve its objective most \line \up0 \expndtw-3\charscalex100 eff
iciently. Managerial decisions are evaluated through concepts, tools and \line \
up0 \expndtw-3\charscalex100 techniques of economic analysis of various types. I
t is linked with various fields of \line \up0 \expndtw-6\charscalex100 study. \p
ar\pard\ql \li1167\sb0\sl-322\slmult0 \par\pard\ql\li1167\sb245\sl-322\slmult0\t
x1797 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf6\f7\fs28 1.9 \tab \up0 \ex
pndtw-2\charscalex100 SELF-ASSESSMENT QUESTIONS \par\pard\ql \li1167\sb0\sl-253\
slmult0 \par\pard\ql\li1167\sb82\sl-253\slmult0 \up0 \expndtw-4\charscalex100 \u
l0\nosupersub\cf1\f2\fs22 1. Discuss the nature and scope of managerial economi
cs. \par\pard\ql \li1167\sb87\sl-253\slmult0\tx1451 \up0 \expndtw-5\charscalex10
0 2. \tab \up0 \expndtw-3\charscalex100 \u8220?Managerial economics is the integ
ration of economic theory with business \par\pard\qj \li1437\ri3267\sb0\sl-280\s
lmult0 \up0 \expndtw-3\charscalex100 practice for the purpose of facilitating de
cision-making and forward planning by \up0 \expndtw-4\charscalex100 manager\u822
1?. Explain and comment. \par\pard\qj \li1167\ri3423\sb62\sl-260\slmult0\tx1437
\up0 \expndtw-2\charscalex100 3. Define scarcity and opportunity cost. What rol
e do these two concepts play in \line\tab \up0 \expndtw-3\charscalex100 the maki
ng of management decisions? \par\pard\qj \li1167\ri3510\sb100\sl-260\slmult0\tx1
437 \up0 \expndtw-2\charscalex100 4. Managerial economics is often said to help
the business student integrate the \line\tab \up0 \expndtw-2\charscalex100 know
ledge gained in other courses. How is this integration accomplished? \par\pard\q
l \li1167\sb86\sl-253\slmult0 \up0 \expndtw-3\charscalex100 5. Compare and cont
rast microeconomics with macroeconomics. Although \par\pard\qj \li1437\ri3416\sb
22\sl-260\slmult0 \up0 \expndtw-4\charscalex100 managerial economics is based pr
imarily on microeconomics, explain why it is \up0 \expndtw-5\charscalex100 also
important for managers to understand macroeconomics. \par\pard\ql \li1167\sb86\s
l-253\slmult0 \up0 \expndtw-3\charscalex100 6. Justify that managerial economic
s is economics applied in decision-making. \par\pard\ql \li1167\sb107\sl-253\slm
ult0 \up0 \expndtw-3\charscalex100 7. What is the role of managerial economics
in preparing managers? \par\pard\ql \li1167\sb87\sl-253\slmult0 \up0 \expndtw-4\
charscalex100 8. How is managerial economics related to different disciplines?
\par\pard\ql \li1167\sb0\sl-322\slmult0 \par\pard\ql\li1167\sb248\sl-322\slmult0
\tx1887 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf6\f7\fs28 1.10 \tab \up0
\expndtw-4\charscalex100 FURTHER READINGS \par\pard\qj \li1167\ri4103\sb213\sl-2
80\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf1\f2\fs22 Haynes, W.W
., \ul0\nosupersub\cf13\f14\fs22 Managerial Economics: Analysis and Cases,\ul0\n
osupersub\cf1\f2\fs22 Business \up0 \expndtw-4\charscalex100 Publications, Inc.
, Texas, Ch. 1. \par\pard\ql \li1167\sb123\sl-253\slmult0 \up0 \expndtw-4\charsc
alex100 Adhikary, M., \ul0\nosupersub\cf13\f14\fs22 Managerial Economics,\ul0\no
supersub\cf1\f2\fs22 Khosla Publishers: Delhi, Ch. 1. \par\pard\qj \li1167\ri32
37\sb122\sl-260\slmult0 \up0 \expndtw-2\charscalex100 Baumol, William, J., \ul0\
nosupersub\cf13\f14\fs22 Economic Theory and Operations Analysis,\ul0\nosupersub
\cf1\f2\fs22 Prentice-Hall of \up0 \expndtw-4\charscalex100 India Pvt. Ltd., Ne
w Delhi. \par\pard\ql \li11144\sb0\sl-253\slmult0 \par\pard\ql\li11144\sb0\sl-25
3\slmult0 \par\pard\ql\li11144\sb0\sl-253\slmult0 \par\pard\ql\li11144\sb0\sl-25

3\slmult0 \par\pard\ql\li11144\sb0\sl-253\slmult0 \par\pard\ql\li11144\sb205\sl253\slmult0 \up0 \expndtw-4\charscalex100 11
}}
}}
}}
}}
}}
}}\par\pard\sect\sectd\fs24}

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\tx1708 \up0 \expndtw-4\charscalex100 1.4\tab \up0 \expndtw-4\charscalex100 Appr

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crucial questions posed \line \up0 \expndtw-3\charscalex100 above. There are th

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