Managerial Economics may be defined as the study of economic theories, logic and methodology which are

generally applied to seek solution to the practical problems of business. Managerial 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. Managerial Economics is often called as Business Economics or Economic for Firms. It
draws heavily from quantitative techniques such as regression analysis, correlation and calculus.

Economics, is a study of production, consumption and distribution. Its a study of economics activities, where one
can fulfill their unlimited wants through limited resources. Economics is a social science concerned with the
production, consumption of goods and services, distribution

Economy is the system of how money is made and used within a particular country or region. A region's economy is
connected with things like how many goods and services are produced and how much money people can spend on
these things.
the wealth and resources of a country or region, especially in terms of the production and consumption of goods and
services.

Economics Basics – Cost, efficiency and scarcity

Going by the geeky definition, opportunity cost is the value of the next-highest-valued substitute use of that
resource. Elasticity is defined as the change in quantity of the goods associated with a change in the prices.

Basic Concepts of Economics

Economics deals with maintaining an efficient balance between unlimited wants and limited resources in everyone's
life. Economics also deals with the production, distribution, and consumption of goods and service

What is the nature and scope of economics?

The nature and scope of economics are related to the study of wealth or human behaviour or of scarce resources.
The scope is very wide and includes the subject matter of economics whether economics is a science or an art or
whether it is positive or normative science.

What is the scope of managerial economics?

Managerial Economics has a more narrow scope - it is actually solving managerial issues using micro-economics.
Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient
decisions concerning customers, suppliers, competitors as well as within an organization.

Nature of Managerial Economics:

 The primary function of management executive in a business organisation is decision making and forward
planning.
 Decision making and forward planning go hand in hand with each other. Decision making means the
process of selecting one action from two or more alternative courses of action. Forward planning means establishing
plans for the future to carry out the decision so taken.
 The 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.
 The decision making function is that of the business executive, he takes the decision which will ensure the
most efficient means of attaining a desired objective, say profit maximisation. After taking the decision about the
particular output, pricing, capital, raw-materials and power etc., are prepared. Forward planning and decision-
making thus go on at the same time.
 A business manager’s task is made difficult by the uncertainty which surrounds business decision-making.
Nobody can predict the future course of business conditions. He prepares the best possible plans for the future
depending on past experience and future outlook and yet he has to go on revising his plans in the light of new
experience to minimise the failure. Managers are thus engaged in a continuous process of decision-making through
an uncertain future and the overall problem confronting them is one of adjusting to uncertainty.
  In 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. The way economic analysis can be used towards
solving business problems, constitutes the subject-matter of Managerial Economics.
 Thus in brief we can say that Managerial Economics is both a science and an art.
Scope of Managerial Economics:
The scope of managerial economics is not yet clearly laid out because it is a developing science. Even then the
following fields may be said to generally fall under Managerial Economics:
1. Demand Analysis and Forecasting
2. Cost and Production Analysis
3. Pricing Decisions, Policies and Practices
4. Profit Management
5. Capital Management
These divisions of business economics constitute its subject matter.
Recently, managerial economists have started making increased use of Operation Research methods like Linear
programming, inventory models, Games theory, queuing up theory etc., have also come to be regarded as part of
Managerial Economics.
1.Demand Analysis and Forecasting: A business firm is an economic organisation which is engaged in transforming
productive resources into goods that are to be sold in the market. A major part of managerial decision making
depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing
production schedules and employing resources. It will help management to maintain or strengthen its market
position and profit base. Demand analysis also identifies a number of other factors influencing the demand for a
product. Demand analysis and forecasting occupies a strategic place in Managerial Economics.
2.Cost and production analysis: A firm’s profitability depends much on its cost of production. A wise manager would
prepare cost estimates of a range of output, identify the factors causing are cause variations in cost estimates and
choose the cost-minimising output level, taking also into consideration the degree of uncertainty in production and
cost calculations. Production processes are under the charge of engineers but the business manager is supposed to
carry out the production function analysis in order to avoid wastages of materials and time. Sound pricing practices
depend much on cost control. The main topics discussed under cost and production analysis are: Cost concepts, cost-
output relationships, Economics and Diseconomies of scale and cost control.
3.Pricing decisions, policies and practices: Pricing is a very important area of Managerial Economics. In fact, price is
the genesis of the revenue of a firm ad as such the success of a business firm largely depends on the correctness of
the price decisions taken by it. The important aspects dealt with this area are: Price determination in various market
forms, pricing methods, differential pricing, product-line pricing and price forecasting.
4.Profit management: Business firms are generally organized for earning profit and in the long period, it is profit
which provides the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty
bearing and risk taking. A successful business manager is one who can form more or less correct estimates of costs
and revenues likely to accrue to the firm at different levels of output. The more successful a manager is in reducing
uncertainty, the higher are the profits earned by him. In fact, profit-planning and profit measurement constitute the
most challenging area of Managerial Economics.
5.Capital management: The problems relating to firm’s capital investments are perhaps the most complex and
troublesome. Capital management implies planning and control of capital expenditure because it involves a large
sum and moreover the problems in disposing the capital assets off are so complex that they require considerable
time and labour. The main topics dealt with under capital management are cost of capital, rate of return and selection
of projects.

Conclusion: The various aspects outlined above represent the major uncertainties which a business firm has to
reckon with, viz., demand uncertainty, cost uncertainty, price uncertainty, profit uncertainty, and capital uncertainty.
We can, therefore, conclude that the subject-matter of Managerial Economics consists of applying economic
principles and concepts towards adjusting with various uncertainties faced by a business firm.
The difference between micro and macro economics is simple. Microeconomics is the study of economics at an
individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a
whole. Microeconomics focuses on issues that affect individuals and companies.

Macroeconomics is a branch of economics that studies how an overall economy—the market systems that operate
on a large scale—behaves. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate
of economic growth, national income, gross domestic product (GDP), and changes in
unemployment.Microeconomics studies the decisions of individuals and firms to allocate resources of production,
exchange, and consumption. Ex. Households,firms, industries

The aim of studying economics is to understand the decision process behind allocating the currently available
resources, the needs always unlimited but resources being limited.Adam Smith wrote ‘An inquiry into the Nature
and Causes of the Wealth of Nations‘ which as the name suggests, was an attempt at understanding the reasons
behind the economic growth (or lack thereof) of a nation.An interesting backdrop to consider here — the
fundamental assumption that we need to make for the whole economic system (as we know it today) to work is that
human beings are motivated by pure self-interest and will take decisions that they think will make them ‘better off’
now or sometime in the future.

The economic and political systems of a country are closely inter-linked and jointly determine the well-being of its
citizens.

Economics Basics – Demand & Supply

It is perhaps one of the most fundamental tenets

and provides a fundamental framework in which to assess the actions of an economy.

Definition of Demand: Demand is the quantity of a good (or service) the buyers are willing to purchase at a
particular price.
Definition of Supply: Supply is the quantity of a good the sellers are willing to deliver at a particular price.
Meanwhile price is a result of the constant tug-of-war between the demand and supply.
And all other random things kept constant for a good (brand, quality etc.); higher the price— lower will be the
demand from the consumer (to save up for other purchases).

Higher the price, higher will be the supply from the manufacturers (make hay while the sun shines!).

The former is called the law of demand, and latter is called the law of supply.
Time also plays a huge role in a free-market economy, more so in the case of entities in a competition to serve the
consumers. Stock-outs are no good for a supplier as it affects the brand and the consumer can move elsewhere.

If there is an excess of demand, the producers have to gauge the nature of demand first (seasonal, increasing trend)
to react in a swift fashion, to corner the market and retain the existing customers.
The stable state of equilibrium in an economic system makes the economy efficient, the suppliers are moving their
goods and the consumers are getting what they are demanding.

The only point worth noting: the point of equilibrium is ever-elusive and fluctuates like a wild boar in each minute
quantum of time.

Economics Basics – The free market hypothesis

In a perfect free market, for any good or service— the total quantity supplied by the sellers and the total quantity
demanded by the buyers will reach a state of economic equilibrium over time.

Things closely follow the free market paradigm if two basic assumptions hold true: perfect competition and absence
of “unnecessary” government quotas and regulations.

Perfect competition assumes that no seller is large enough to sway the natural movement of the market owing to its
large market share and cash reserves, which too often becomes the case for corporations in a capitalistic system with
the wherewithal to wipe out smaller players.

In these cases, regulations to prevent monopolies and unfair practices become all the important to ensure that the
market remains efficient.

On the other hand, too many government regulations and quotas (pre-liberalization India was on the verge of
bankruptcy) hinder the natural process towards equilibrium and result in easily avoidable inefficiencies in the
system.

How much government regulation is the right amount is a question which we are yet to answer with full confidence,
but we know for sure that both extremes can be really bad!

Economics Basics – Cost, efficiency and scarcity

 Going by the geeky definition, opportunity cost is the value of the next-highest-valued substitute use of that
resource. For instance you may forego going to the physics class for a session of LAN gaming, but the
risk of not understanding subsequent lectures and flunking the semester is the opportunity cost you
should be aware of. Every entity has a different point-of-view regarding this opportunity cost as the needs
and resources of entities keep shifting with time.
 Economic efficiency is the measure of output obtained with a given set of inputs, i.e. least amount of
wastage. Technological ability usually decides the upper limit for the maximum efficiency which can be
achieved.
 The basic definition of scarcity is slightly philosophical— humans have unlimited desires but the means of
production being finite and limited (labor, land and capital), various trade-offs are to be made to allocate
the resources in the most efficient way possible.
 The production-possibility frontier (PPF) is a bridge which ties the three concepts. If we assume that the
economy produces just a couple of goods (guns and butter are the default choices for economists, scary
lot!), then the economy can produce a greater quantity of guns only if it reduces the quantity of butter
 produced. Each point on the PPF curve shows the maximum possible output of an economy (i.e. the
potential that the economy holds).
 Elasticity is defined as the change in quantity of the goods associated with a change in the prices. It usually
depends on the nature of product (luxury v/s necessity), the number of substitutes available in the market,
share of wallet etc.
 If quantity of the good changes drastically with a change in its prices, it is said to be elastic
(PS3 selling at a 40% discount will see a sharp rise in the total number of units sold).

 If quantity of the good does not change much with a change in its prices, it is said to be
inelastic (onions need to be purchased even after the prices double as it is a basic necessity and
there are no actual substitutes).

 Utility is the satisfaction that one achieves from consuming a good/service, and is an abstract concept based
on the individual in question. Marginal utility is the extra satisfaction one gets from each additional unit
of consumption.
Taking a holistic example in lieu of an easier and obvious one — research proves that the money one
earns contributes hugely towards average life happiness in the initial stages of getting those riches, but its
role tapers off sharply as the income grows.

The economists refer to this is as the law of diminishing marginal utility. The third chocolate doesn’t
seem as tasty as the first one, eh?

The ‘specialist world’

The fundamental concept which is responsible for economic growth as we know it is specialization of labor. If an
entity is really efficient in producing a commodity (output to input ratio is high), it has an advantage over another
entity which is not that efficient in producing the commodity under consideration.

If I am good at making shoes and you are good at making jam, it makes sense to do what we are good at and trade
afterwards.

Moreover, the economies of scale prove to be an icing on the cake — the production cost per unit decreases as we
produce more and more of the same units (the initial one-time setup cost can be a major part of the total expense).
And the best part is that both parties are better off after doing the transaction (and so is Mother Earth, for less
wastage).
Just to appreciate the grandeur of this simple idea, just imagine your standard of living in a world where you have to
produce everything for yourself. You would likely revert to a medieval lifestyle, growing your own food and
defending our own property. Say goodbye to the iPhones, cushy jobs, roads (even the shitty ones), branded clothes
and the air-conditioned comforts.

Studying economics can be both rewarding and intimidating at first, but knowledge of basic economics is essential
not only for the B-School junta but for anyone who interacts with markets. In an era where having money is one of
the prime determinants of the ability to make more of it, you better watch out and get your basics right.

Decision making lies at the heart of most important business and government problems
Managerial economics applies many familiar concepts from economics—demand and cost, monopoly and
competition, the allocation of resources, and economic trade-offs—to aid managers in making better decisions. This
book provides the framework and the economic tools needed to fulfill this goal.

SUMMARY Decision-Making Principles 1. Decision making lies at the heart of most important problems managers
face. Managerial economics applies the principles of economics to analyze business and government decisions. 2.
The prescription for sound managerial decisions involves six steps: (1) Define the problem; (2) determine the
objective; (3) explore the alternatives; (4) predict the consequences; (5) make a choice; and (6) perform sensitivity
analysis. This framework is flexible. The degree to which a decision is analyzed is itself a choice to be made by the
manager. 3. Experience, judgment, common sense, intuition, and rules of thumb all make potential contributions to
the decision-making process. However, none of these can take the place of a sound analysis. Nuts and Bolts 1. In the
private sector, the principal objective is maximizing the value of the firm. The firm’s value is the present value of its
expected future profits. In the public sector, government programs and projects are evaluated on the basis of net
social benefit, the difference between total benefits and costs of all kinds. Benefit-cost analysis is the main economic
tool for determining the dollar magnitudes of benefits and costs. 2. Models offer simplified descriptions of a process
or relationship. Models are essential for explaining past phenomena and for generating forecasts of the future.
Deterministic models take the predicted outcome as c01IntroductiontoEconomicDecisionMaking.qxd 8/18/11 6:46
PM Page 21 certain. Probabilistic models identify a range of possible outcomes with probabilities attached. 3. The
principal objective of management is to maximize the value of the firm by maximizing operating profits. Other
management goals sometimes include maximizing sales or taking actions in the interests of stakeholders (its
workers, customers, neighbors). The principal objective of public managers and government regulators is to
maximize social welfare. According to the criterion of benefit-cost analysis, a public program should be undertaken
if and only if its total dollar benefits exceed its total dollar costs. 4. Sensitivity analysis considers how an optimal
decision would change if key economic facts or conditions are altered