Managerial

Economics
UNIT I

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Topics
Managerial Economics - meaning, nature and
scope - Managerial Economics and business
decision making - Role of Managerial Economist
- Fundamental concepts of Managerial
Economics. Demand Analysis - meaning,
determinants and types of demand - Elasticity
of demand.

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The purpose of studying economics is not to acquire a set of ready-
made answers to economic questions, but to avoid being deceived
by economists
- Joan Robinson
76% of senior executives say that it is important they have the
knowledge and skills to respond to trends like resource scarcity,
the low carbon economy and doing business in emerging markets

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WHAT IS ECONOMICS?
Root of the word economics comes from Greek word
Oikonomia (management of household or household
rules).

Economists dictionary of economics defines it as The study

of production, distribution and consumption of wealth in
society
WHAT IS ECONOMICS?
Its basic function is to study how people- individuals,
households, firms and nations maximize their gains
from their limited resources and opportunities.
What is Economics?

Unlimited wants and scarce resources

Science [methodology] or Art [Application]?

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What is Economics? Contd

Father of Economics

Economics is
the study of
nature and
uses of national
wealth.

Adam Smith (1723-1790)

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Who is He? Adam Smith
Adam Smith, considered to be the founding father of modern
Economics, defined Economics as the study of the nature and causes
of nations' wealth or simply as the study of wealth. ... Adam Smith's
definition is a wealth-centred definition of Economics.

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 Definitions: Managerial Economics

Integration of Economic theory with business practice for purpose of

facilitating decision making and forward planning by management
- Spencer & Siegelman

It is concerned with the application of economic concepts and economics to

the problems of formulating rational decision making
-Mansfield
Defining Economics
Economics is a social science, which studies human behaviour
in relation to optimizing allocation of available resources to
achieve the given goals.

Eg : individual household behaviour, firm, industry and nation

Economics is also a study of choice-making behaviour of the people.

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Why do Managers need to know Economics?

Economic theories contribute in building analytical models, which help to

recognize the structure of managerial problems

Economic theories do enhance analytical capabilities of business analyst

They offer clarity to various concepts used in business analysis, which

enables the managers to avoid conceptual pitfalls
Decision Problems faced by firms

1. What should be the price of the product?

2. What should be the size of the plant to be installed?
3. How many workers should be employed?
4. What is the optimal level of inventories of finished products, raw
material, spare parts, etc.?
5. What should be the cost structure?
Characteristics: Managerial Economics

1. Is Normative rather than positive in character

2. It is prescriptive/Pragmatic rather than descriptive
3. Also uses Macroeconomics since it provides an intelligent understanding of
environment Micro Economics
4. Economics of Firms
5. Bridge between traditional economics and Business Management
Basic Assumptions
I. Ceteris Paribus- Other things remaining equal

It is a Latin word means with other things (being) the same

The existence of other tendencies is nor denied, but their

disturbing effect is neglected for a time - Marshall

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Basic Assumptions
II. Rationality
Implies that consumers and producers measure and
compare costs and benefits before taking decisions

Consumers: Maximising utility and minimising sacrifice

Producers : Maximising profits and minimising costs

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Types of Economic Analysis
A. Micro(individual consumers and firms)
Macro (Aggregates- Industry, not firm)

B. Positive (factual statements- What is) The distribution of

income in India is unequal.
Normative (Value judgments- What ought to be) The
distribution of income in India should be equal.

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Types of Economic Analysis
C. Time period

Short run -A time period not long enough for

consumers and producers to adjust to a new
situation- K/L
Long run- Planning horizon- A time period long
enough for consumers and producers to adjust to a
new situation- All inputs can be varied- K and L-
Whether to change product lines, build new plant
etc.
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Kinds of Economic Questions
1. What to Produce? (Micro)
2. How to Produce? (Micro)
3. How much to produce? (Micro)
4. For Whom to Produce? (Micro)
5. Are Resources Used optimally? (Micro)

6. Are Resources fully employed? (Macro)

7. Is the economy Growing? (Macro)
8. In what phase of business cycle is the economy? (Macro)

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Conception of Managerial Economics 20
 Managerial Economics- Meaning

Application of economic theory and tools of analysis of

decision science to examine how an organization can
achieve its objectives most efficiently
- Salvatore

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Meaning

Spencer and Siegelman: Integration of economic theory

with business practice for the purpose of facilitating
decision making and forward planning by management

Evan Douglas: Application of economic principles and

methodologies to the decision-making process within the
firm or organizationunder conditions of uncertainty

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Conceptualization of ME
Economics
Theory &
Methodology

Managerial
Economics
Application of
economics to
solve business
problems
Business
Management
Decision
Problems

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Users of Managerial Economics

Thank you sir

I learned many
economic
concepts from
you. Its
helping me a
lot
Economist
Manager

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Uses of Managerial Economics
Uses for Integration of Economic theory
Uses as solution to practical business problems
Optimum use of scarce resources
Used for other objectives
Used for overall development
Used in making right decision

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Importance
Basis of Business Policies
Predicting economic Quantities
Estimating economics relationship
Helpful in Understanding the External forces constituting the environment.
Reconciling theoretical concepts of economics in relation to the actual business behavior and
conditions.

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Basic Economic Principles for Managerial Decision
making/Fundamental concepts of Managerial Economics

1. Opportunity Cost Principle

2. Marginal Principle
3. Incremental Principle
4. Equi - Marginal Principle
5. Time Perspective Principle
6. Discounting Principle
7. Scarcity Principle
8. Principle of Risk and uncertainity
Roles & Responsibilities of a managerial economist in the firm

Demand estimation and forecasting

Preparation of business /sales forecasts

Analysis of market survey to determine the nature and extent of competition

Analyzing the issues and problems of concerned industry

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Assisting the business planning process of the firm

Discovering new possible fields of business endeavor and its cost-benefit analysis

Advising on prices, investment and capital budgeting policies

Evaluation of capital budgeting etc.

To make reasonable profits on capital employed

Successful forcasts

Knowledge of sources of economic information

His status in the firm

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Nature
Microeconomics
Normative economics
Uses theory of firm
Takes the help of macroeconomics
Aims at helping the management
A scientific art
Prescriptive rather than descriptive

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Scope of ME
Theory of demand
Demand Analysis
Theory of capital and
Demand Theory
investment
Theory of production
Variable factor of production Environmental issues
Fixed factor of production Business cycles
Industrial policy of the
Theory of exchange or price country
theory Trade and fiscal policy of the
country
Theory of profit Taxation policy of the country
Price and labour policy
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Relationship to.
1. Production management (strategic decisions, operating decisions and control decisions).

2. Marketing management(marketing strategy decisions, pricing decisions, value chain

analysis, cost analysis.)

3. Finance management(financial decisions)

Relationship to.
4. Personnel management(strategic human resource, planning models, HR-performance
management )

5. Operation research (advanced analytical methods to make better economic and business
decisions).
Demand Analysis
 What is Demand?
Demand means effective desire or want for a commodity which is backed up by the
ability (purchasing power) and willingness to pay for it.

Demand = Desire + Ability to pay + Willingness to spend

Demand is a relative concept not absolute

It is related to price , time and place.

The demand for a commodity refers to the amount of it which will be bought per unit
of time at a particular price
( in a particular market).
Types of demand
Demand for Consumer goods & producer goods
Autonomous demand & Derived demand
- Direct & indirect demand
Demand for durable & non-durable goods
- Replacement demand in case of durable goods
Firm demand and industry demand
Short term demand & Long term demand
New demand and replacement demand
Total market and segment market demand
Determinants of Demand
Price of the Commodity
Income of the Consumer
Prices of related goods
Tastes of the Consumers
Wealth
Population
Government Policy
Expectations regarding the future
Climate and weather
The Law of Demand
Statement of Law : Other things being equal, the higher the price of a commodity, the
smaller is the quantity demanded and lower the price, larger the quantity demanded.
The Law of Demand
OTHER THINGS BEING EQUAL , THE DEMAND IS HIGHER
WITH THE FALL IN PRICE , AND DIMINISHES WITH RISE
IN PRICE.
- PRO. MARSHALL

The reverse is also true:

as the price of a good or service falls, quantity demanded increases.
SCHEDULE AND DIAGRAM OF
LAW OF DEMAND
ASSUMPTION
1. No Change In Consumer Income and demand of product should be continuous
2. No Change In Consumer Preference
3. No Change In Fashion
4. No Change In Price Of Related Goods/Price of other goods should not change
5. No Expectation Of Future Price Changes
6. Income remain constant
7. Quantity Of Money
8. Level Of Taxes
9. Climate Condition
10. There should be no substitute for the commodity
EXCEPTIONS
1. Inferior Goods /Giffen paradox effect
2. Ignorance
3. Prestigious Goods/Veblen/Demonstration effect
4. Illusion/Speculative effect
5. Fear of shortage
6. Necessaries
 Elasticity of demand

Elasticity of demand is the degree of responsiveness of demand to the changes

in its determinants.

(A) PRICE ELASTICITY O DEMAND

The extent of response of demand for a commodity to the changes
in its price, other determinants of demand remaining constant is
called price elasticity of demand.
Types of price elasticity of demand
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Relatively elastic demand
4. Relatively inelastic demand
5. Unitary elastic demand
(B) INCOME ELASTICITY OF DEMAND
The degree of responsiveness of demand for a commodity to the changes in
the consumers income is known as income elasticity of demand

Types of income elasticity

1. Unitary income elasticity
2. Income elasticity grater than one
3. Income elasticity less than one
4. Zero income elasticity
5. Negative income elasticity
(C) CROSS ELASTICITY OF DEMAND

The degree of responsiveness of demand for a commodity to a given change

in the price of some other related commodity is known as cross elasticity of
demand.

In case of substitutes
In case of compliments
In case of unrelated commodities
(D) ADVERTISING / PROMOTIONAL ELASTICITY OF DEMAND
The degree of responsiveness of demand for a commodity to given change in
the advertising or promotional expenses is known as cross elasticity of
demand.

(E) SUBSTITUTION ELASTICITY OF DEMAND

The degree of responsiveness of demand ratio between X & Y to a given
change in their price ratio is known as substitution elasticity of demand.
References

1. Managerial Economics in a Global Economy Dominick Salvatore

2. Managerial Economics Geetika, Piyali Ghosh and Purba Roy
Choudhury
3. Managerial Economics R. L. Varshney and K.L. Maheshwari

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