Meaning of Economics Economics is a social science that studies how individuals, governments, firms and nations make choices

on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behaviour of the aggregate economy; and microeconomics, which focuses on individual consumers. Definition of Economics Economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. Lord obbins Meaning of Managerial Economics !anagerial economics is a discipline which deals with the application of economic theory to business management. !anagerial economics can be broadly defined as the study of economic theories, logic and tools of economic analysis that are used in the process of business decision making. "t deals with the use of economic concepts and principles of business decision making. !anagerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analysing business problems for rational business decisions. Definition of Managerial Economics: !anagerial economics is concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision. # !ansfield

!anagerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. # $pencer and $eegelman.

!anagerial Economics is economics applied in decision making. "t is a special branch of economics bridging the gap between abstract theory and managerial practice. # Haynes, Mote and Paul.

%usiness Economics consists of the use of economic modes of thought to analyse business situations. & !c'air and !eriam

Nature of Managerial Economics:

(he primary function of management e)ecutive in a business organisation is decision making and forward planning. *ecision making and forward planning go hand in hand with each other. *ecision making means the process of selecting one action from two or more alternative courses of action. +orward planning means establishing plans for the future to carry out the decision so taken. (he problem of choice arises because resources at the disposal of a business unit ,land, labour, capital, and managerial capacity- are limited and the firm has to make the most profitable use of these resources. (he decision making function is that of the business e)ecutive, he takes the decision which will ensure the most efficient means of attaining a desired ob.ective, say profit ma)imisation. /fter taking the decision about the particular output, pricing, capital, raw& materials and power etc., are prepared. +orward planning and decision&making thus go on at the same time. / business manager0s task is made difficult by the uncertainty which surrounds business decision&making. 'obody can predict the future course of business conditions. 1e prepares the best possible plans for the future depending on past e)perience and future outlook and yet he has to go on revising his plans in the light of new e)perience to minimise the failure. !anagers are thus engaged in a continuous process of decision& making through an uncertain future and the overall problem confronting them is one of ad.usting to uncertainty. "n fulfilling the function of decision&making in an uncertainty framework, economic theory can be, pressed into service with considerable advantage as it deals with a number of concepts and principles which can be used to solve or at least throw some light upon the problems of business management. E.g are profit, demand, cost, pricing, production, competition, business cycles, national income etc. (he way economic analysis can be used towards solving business problems, constitutes the sub.ect&matter of !anagerial Economics. (hus in brief we can say that !anagerial Economics is both a science and an art.

Scope of Managerial Economics:

(he scope of managerial economics comprises all those economic concepts, theories and tools of analysis which can be used to analyse issues related to demand prospects, production and costs, market structure, level of competition and general business environment and find solutions to practical business problems. "t may be broadly divided into two catagories. ,a- !icro&Economics applied to operational or internal issues. ,b- !acro&Economics applied to environmental or e)ternal issues.

Micro-Economics applied to Operational Issues

Theory of Demand *emand theory deals with consumer0s behaviour. "t answers such 2uestions as: 1ow do the consumers decide whether or not to buy a commodity3 1ow do they decide on the 2uantity of a commodity3 4hen do they stop consuming a commodity3 1ow do the consumers behave when price of the commodity, their income and tastes and fashion, etc., change3 /t what level of demand, does changing price become inconse2uential in terms of total revenue3 (he 5nowledge of demand theory can, therefore, be helpful in making the choice of commodities, finding the optimum level of production and in determining the price of the product.

Theory of Production and Production Decision 6roduction (heory e)plains the relationship between inputs and output. "t also e)plains under what conditions costs increases or decreases: how total output behave when units of one factor ,input- are increased keeping other factors constant or when all factors are simultaneously increased; how can output be ma)imised from a given 2uantity of resources; and how can the optimum si7e of output be determined3 6roduction theory, thus helps in determining the si7e of the firm, si7e of the total output and the amount of capital and labour to be employed, given the ob.ective of the firm.

Analysis of Mar et-Structure and Pricing Theory 6rice theory e)plains how price is determined under different kinds of market conditions; when price discrimination is desirable, feasible and profitable; and to what e)tent advertising can be helpful in e)panding sales in a competitive market. (hus, price theory can be helpful in determining the price policy of the firm. 6rice and production theories together, in fact, help in determining the optimum si7e of the firm.

Profit Analysis and Profit Management 6rofit making is the most common ob.ective of all business undertaking. %ut, making a satisfactory profit is not always guaranteed because a firm has to carry out its activities under conditions of uncertainty with regard to ,i- demand for the product ,ii- input prices in the factor market, ,iii- nature and degree of competition in the product, and ,iv- price behaviours under changing conditions in the product market, etc. (herefore an element of risk is always there. (he firms are therefore supposed to safeguard their interest and avert or minimi7e the possibilities of risk. 6rofit theory guides firms in the measurement and management of profit, in making allowances for the risk premium, in calculating the pure return on capital and pure profit and also for future profit planning.

Theory of !apital and In"estment Decisions 8apital is a scarce and e)pensive factor. "ts efficient allocation and management is one of the most important task of the managers and a determinant of the success level of the firm. (he ma.or issues related to capital are ,i- choice of investment pro.ects, ,ii- assessing the efficiency of the capital, and ,iii- most efficient allocation of capital. 5nowledge of capital theory can contribute a great deal in investment decision making, choice of pro.ects, maintaining the capital, capital budgeting, etc.

MA!#O-E!ONOMI! ISS$ES%

(he ma.or macroeconomic issues that figures in the decision&making may be described under the following catagories.

Issues #elated to Macro-economic Trends in the Economy !acroeconomic trends are indicated by the trends in the macro variables e.g., the level of 9*6, investment climate, trends in national output and employment as well as the price trends. (hese factors not only determine the prospects of private business, but also greatly influence the functioning of individual firms. (herefore, a firm planning to set up a new unit would like to as itself :4hat is the general trend in the economy3 4hat would be the consumption level and pattern of the society3 4ill it be profitable to e)pand the business30 /nswers to these 2uestions and like are sought through macroeconomic studies.

Issues #elated to &oreign Trade

!ost countries have trade and financial relations with other countries. +irms dealing in e)ports and imports are affected directly and more than the rest of the economy. +luctuation in the international market, e)change rate and inflows and outflows of capital in an open economy have a serious bearing on its economic environment and, thereby, on the functioning of its business undertaking. (he manager of a firm would therefore be interested in knowing the trends in the international trade, prices, e)change rate and prospects in the international market. (hese aspects constitute a part of macroeconomic studies.

Issues #elated to 'o"t% Policies 9ovt. 6olicies designed to control and regulate economic activities of the private business affect the functioning of the private business undertaking. $ometime firms0 activities lead to considerable social costs, in terms of environment pollution, traffic congestion in the cities, creation of slums, etc. $uch social cost not only brings a firm0s interest in conflict with those of society, but also imposes a social responsibility on the firms. (he govt. 6olicies are designed to measure such social costs and conflicts. (he manager should, therefore, be fully aware of aspirations of the people and give such factors a due consideration in their decisions. (he economic concepts and tools of the analysis help in determining such costs and benefits