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Management

business world is characterized by

dynamism ,computerization,
Economies are no longer self-sufficient, inwardlooking; added is the pressure of severe competition
due to globalization.
Darwins principle applies even today nay more
strongly.
Big corporates follow military strategies involving
surprise, security and unity of command.
Business units aim at a variety of goals / objectives.
Problem of economizing and choice are most
important for frms.

Modern

 Decision-making

is a must at every stage.

Survival amidst uncertainties is no doubt
challenging. Managerial Economics helps
them to plan and implement decisions in such
a complex and dynamic atmosphere.
Business Economics or Economics of frms
provides managers with different tools.
techniques and principles enabling them
make optimum use of resources within
constraints.

Introduction to Managerial Economics

What is Economics?
What is Micro and Macro economics?
What is Managerial Economics?
Nature, scope and significance of Managerial Economics
How it is useful to a Manager?
Functions of a Managerial Economist?
What Role a managerial Economist plays in the Management Team

Introduction to Managerial Economics

Def:- Economics is the Study of allocation of scarce resources, among

alternative uses.
1. Resources are always scarce.
2. They are not only scarce, but also have alternative uses.
3. Optimum allocation is required
Allocation problems are faced by individuals, Organizations (Both
profit making and non- profit making) and Nations also.

Economics deals with:

1. How an individual consumer allocates his scarce resources
among alternative uses?
- in such a way that he always tries to get maximum satisfaction.
- Maximization of satisfaction / utility is the goal of an individual
consumer.
2. Similarly, an individual producer aims at least cost combination
of inputs to get a given quantities of output.

Introduction to Managerial Economics

3. How an individual firm/Industry attains equilibrium.

A firm is said to be an equilibrium, if it attain profit maximizing
level of out put.
It tries to maximize Revenue, or minimize Cost
4. How a country reach equilibrium:
Allocating limited resources in such a way that the desired
goals are reached. The goal may be over all welfare of its
people.
Individuals / organizations (profit/non profit)/nations attain
their goals, by optimum use of limited resources.

Introduction to Managerial Economics

BUSINESS ADMINISTRATION
DECISION PROBLEMS
TRADITIONAL ECONOMICS :
THEORY AND METHODOLOGY

DECISION SCIENCES :
TOOLS AND TECHNICS

MANAGERIAL ECONOMICS :
INTEGRATION OF ECONOMIC
THEORY AND
METHODOLOGY WITH
TOOLS AND TECHNICS
BORROWED FROM OTHER
DECIPLINES
OPTIMAL SOLUTIONS TO
BUSINESS PROBLEMS

Introduction to Managerial Economics

What is Managerial Economics?

Managerial Economics is economics applied in decision making. It is a
special branch of economics bridging the gap between abstract theory
and managerial practice Willian Warren Haynes, V.L. Mote, Samuel Paul
Integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning - Milton H. Spencer
Managerial economics is the study of the allocation of scarce resources
available to a firm or other unit of management among the activities of that
unit
- Willian Warren Haynes, V.L. Mote, Samuel Paul
Price theory in the service of business executives is known as Managerial
economics
- Donald Stevenson Watson

What is Managerial Economics?

14

Douglas - Managerial economics is .. the application of economic principles

and methodologies to the decision-making process within the firm or
organization.
Pappas & Hirschey - Managerial economics applies economic theory and
methods to business and administrative decision-making.
Salvatore - Managerial economics refers to the application of economic theory
and the tools of analysis of decision science to examine how an organisation
can achieve its objectives most effectively.

Introduction to Managerial Economics

Goals of a business firm

-

Single goal or multiplicity of goals

1. Profit maximization - Revenue maximization

Cost minimization
2. Wealth maximization - Value maximization.
3. William J. Baumol

- Sales revenue maximization subject to attainment of desired

profit target.

4. Williamson's modal

Managerial utility maximization

5. Edith Pen rose

- Size (growth) Maximization

6 K.W. Rothschild

- Long run survival

Introduction to Managerial Economics

What is Microeconomics and Macroeconomics ?

Ragnor Frisch : Micro means Small and Macro means
Large
Microeconomics deals with the study of individual behaviour.
It deals with the equilibrium of an individual consumer,
producer, firm or industry.
Macroeconomics on the other hand, deals with economy wide
aggregates.
Determination of National Income Output, Employment
Changes in Aggregate economic activity, known as Business
Cycles
Changes in general price level , known as inflation, deflation
Policy measures to correct disequilibrium in the economy,
Monetary policy and Fiscal policy

The Study of Economics

Macroeconomics concerned with

aggregate behavior of the economy
as a whole
The big picture: growth,
employment, etc.
Choices made by large groups
(like countries)

Microeconomics micro means a

small part Concerned with analysis
of behavior of individual economic
variables such as individual
consumer or a producer or price of a
particular commodity
How do individuals make
economic decisions

Examples of microeconomic and macroeconomic concerns

Production

Prices

Income

The
Diverse Fields ofDistribution of Income
Production/Output in Price of Individual
Individual Industries
Goods and Services
and Wealth
and Businesses
Economics
Price of medical care
Wages in the auto

Microecon
omics

Macroeco
nomics

How much steel

How many offices
How many cars

Price of gasoline
Food prices
Apartment rents

industry
Minimum wages
Executive salaries
Poverty

National
Production/Output

Aggregate Price Level

National Income
Total wages and
salaries

Total Industrial
Output
Gross Domestic
Product
Growth of Output

Consumer prices
Producer Prices
Rate of Inflation

Total corporate profits

Employme
nt
Employmen
t by
Individual
Businesses
& Industries
Jobs in the
steel
industry
Number of
employees
in a firm

Employmen
t and
Unemploy
ment in the
Economy
Total
number of
jobs
Unemploy
ment rate

Three Big Microeconomic Questions

Goods

and services are the objects that people value and

produce to satisfy wants.
Microeconomics

seeks to understand what determines:

What goods and services are produced

How goods and services are produced

For whom goods and services are produced

1-19

Three Big Microeconomic Questions

What

Goods and Services are

Produced?
Figure 1.1 shows the major items
produced in the Canadian economy
today.
It emphasizes the dominant place of
services in our economy.

Three Big Microeconomic Questions

Figure

1.2 shows the trends

in what the Canadian
economy has produced over
the past 50 years.
It shows the decline of
agriculture, mining,
construction, and
manufacturing, and the
expansion of services.

Three Big Microeconomic Questions

facts about what we

produce raise the deeper
question:
What determines the
quantities of houses and
apartments, DVD players, and
corn that we produce?
Microeconomics provides
some answers to these
questions.
The

1-24

Three Big Microeconomic Questions

How

are Goods and Services Produced?

Factors of production are the resources that businesses use to
produce goods and services.
They are grouped into four categories:
Land
Labour
Capital
Entrepreneurship

1-25

Three Big Microeconomic Questions

The

gifts of nature that we use to produce goods

and services are land.
The work time and effort that people devote to
producing goods and services is labour.
The quality of labour depends on human capital,
which is the knowledge and skill that people obtain
from education, on-the-job training, and work
experience.

1-26

Three Big Microeconomic Questions

The

tools, instruments, machines, buildings, and

other constructions that are used to produce goods
and services are called capital.
The human resource that organizes land, labour, and
capital is entrepreneurship.

1-27

Three Big Microeconomic Questions

For

Whom are Goods and Services Produced?

Who gets the goods and services depends on the incomes that
people earn.
Land earns rent.
Labour earns wages.
Capital earns interest.
Entrepreneurship earns profit.

1-28

Introduction to Managerial Economics

Nature, Scope and Significance of Managerial Economics:

Managerial Economics Business Economics
Managerial Economics is Pragmatic(dealing with things sensibly and realistically in
a way that is based on practical rather than theoretical considerations)

Managerial Economics is Eclectic(deriving ideas, style, or taste from a broad

and diverse range of sources)

Managerial Economics is Normative(What ought to be)

Universal applicability

The roots of Managerial Economics spring from Micro Economics

Relation of Managerial Economics to Economic Theory is much like

that of Engineering to Physics or Medicine to Biology. It is the
relation of applied field to basic fundamental discipline

Core content of Managerial Economics

Demand Analysis and forecasting of demand

Production decisions (Input-Output
Decisions)
Cost Analysis (Output - Cost relations)
Price Output Decisions
Profit Analysis
Investment Decisions

Functions of a Managerial Economists

The main function of a manager is decision making and managerial

Economics helps in taking rational decisions.
The need for decision making arises only when there are more
alternatives courses of action.
Steps in decision making :
Defining the problem
Identifying alternative courses of action
Collection of data and analyzing the data
Evaluation of alternatives
Selecting the best alternative
Implementing the decision
Follow up of the action

Decision Problems faced by firms

What

product to produce
What should be the price of the product?
What method of production to use
What should be the size of the plant to be installed?
How many workers should be employed?
What is the optimal level of inventories of finished products,
raw material, spare parts, etc.?
What should be the cost structure?
Whether or not to invest in new equipment

Functions of a Managerial Economists:

Specific functions to be performed by a managerial Economist :

1.

Production scheduling

2.

Sales forecasting

3.

Market research

4.

Economic analysis of competing companies

5.

Pricing problems of industry

6.

Investment appraisal

7.

Security analysis

8.

Advice on foreign exchange management

9.

Advice on trade

10.

Environmental forecasting
- Survey of British Industry by Alexander and Kemp

Role a Managerial Economist in the Management Team:

William J. Baumol, What Can Economic Theory Contribute to

Managerial Economics? American Economic Review, 1961
Baumol concludes that a managerial economist can become a far more
helpful member of a management group by virtue of his studies of economic
analysis, primarily because there he learns to become an effective model
builder and because there he acquires a very rich body of tools and
techniques which can help him to deal with the problems of the firm in a far
more rigorous, a far more probing, and a far deeper manner.

SCOPE OF ECONOMICS

Scope means province or field of study. In discussing the scope

of economics, we have to indicate whether it is a science or an
art and a positive science or a normative science. It also covers
the subject matter of economics.

Economics - A Science and an Art

Economics is a science: Science is a systematized body of
knowledge that traces the relationship between cause and
effect. Another attribute of science is that its phenomena
should be amenable to measurement.
Applying these characteristics, we find that economics is a
branch of knowledge where the various facts relevant to it
have been systematically collected, classified and analyzed.
Economics investigates the possibility of deducing
generalizations as regards the economic motives of human
beings. The motives of individuals and business firms can
be very easily measured in terms of money.
Thus, economics is a science.

Economics - A Social Science

In order to understand the social aspect of economics,

we should bear in mind that labourers are working on
materials drawn from all over the world and producing
commodities to be sold all over the world in order to
exchange goods from all parts of the world to satisfy
their wants.
There is, thus, a close inter-dependence of millions of
people living in distant lands unknown to one another.
In this way, the process of satisfying wants is not only an
individual process, but also a social process. In
economics, one has, thus, to study social behaviour i.e.,
behaviour of men in-groups.

Economics is also an art

An art is a system of rules for the attainment of

a given end.
A science teaches us to know; an art teaches
us to do.
Applying this definition, we find that economics
offers us practical guidance in the solution of
economic problems.
Science and art are complementary to each
other and economics is both a science and an
art.

Positive and Normative Economics

Economics is both positive and normative science. Positive

science: It only describes what it is and normative science
prescribes what it ought to be. Positive science does not
indicate what is good or what is bad to the society. It will
simply provide results of economic analysis of a problem.
Normative science: It makes distinction between good and
bad. It prescribes what should be done to promote human
welfare. A positive statement is based on facts. A normative
statement involves ethical values.
For example, 12 per cent of the labour force in India was
unemployed last year is a positive statement, which could is
verified by scientific measurement. Twelve per cent
unemployment is too high is normative statement comparing
the fact of 12 per cent unemployment with a standard of what
is unreasonable.