Nature and Scope of Managerial

Economics
The word Economics originates from the Greek
word Oikonomikos. Oikos means House and
Nomos means Management.
Considering whole society as a family, society faces
the problem of unlimited wants to be satisfied with
limited resources.
Economics was originally introduced as a science of
statecraft. It was concerned with collection of
revenue for the state.
The study of economics developed to cater to the
needs of the working of modern economy to arrive
at a solution.

Salient Features
Managerial economics means the application of
economic methods and theory to the managerial
decision-making process.
Managerial economics involves microeconomic
analysis to practical problem solving in business.
Aspects of microeconomic theory are: Theory of the
firm, theory of consumer behavior (Demand),
Production and cost theory (Supply), price theory and
market structure and competition theory.
Methods pertain to statistical methods and calculus.
It explores and enhances economic mindfulness and
awareness of business problems and managerial
decisions.
It is concerned with firms behaviour with regard to
optimal allocation of resources.

Micro and Macro Economics

Micro economics is that branch of economic analysis that studies
the economic behaviour of an individual unit which may be a
particular person, a particular household or a particular firm.
Primarily concerned with determination of relative prices of
different goods.
Example: Behaviour of individual consumers and producers and
the interaction of their behaviour.
Macro economics (or Aggregative economics) is that branch of
economic analysis concerned with the study of all units combined
together.
The study under macro economics pertains to the equilibrium in
the economy taking into account macro-variables and aggregates.
Example: Behaviour of national income, national output, total
investment, total consumption and total savings.

Economic Concepts and Principles in

Managerial Decision Analysis
Managerial economics Scientific approach of
economic analysis
Reasoning for economic events and behaviour
Tracing the cause-effect relationships among business variables
Building economic models and testing them empirically.

Managers have to make decisions with regard to

choosing different courses of action.
The economic concepts related to business analysis
and decision-making are: Opportunity cost,
Optimisation technique: equimarginal principle;
Incremental principle, Time perspective and
Discounting Principle.

Economic Cycles
Business cyclerefers to fluctuations in
economic output in a country and has four
phases - recession, depression, recovery,
and expansion.
In the company sense, business cycle
referstostages in thelifespan of asingle
company. Phases in a company's life may
include: birth (or start up), growth,
maturity, decline, and demise.

Economic Cycles

Economic Cycles
Boom
Aboomoccurs when real national output is rising at a rate faster
than the trend rate of growth. Some of the characteristics of a boom
include:
A fast growth ofconsumptionhelped by rising real incomes, strong
confidence and a surge in house prices and share prices
A pick up indemand for capital goodsas businesses invest
inextra capacityto meet strong demand and to make higher profits
More jobs created andfalling unemploymentand higherreal
wages
Highdemand for importswhich may cause the economy to run a
largertrade deficitbecause it cannot supply all of the goods and
services that consumers are buying.
Government tax revenueswill be rising as people earn and spend
more and companies are making larger profits

Economic Cycles
Slowdown
A slowdown occurs when the rate of growth decelerates but
national output is still rising
If the economy grows without falling into recession, this is
called asoft-landing
Recession
Arecessionmeans a fall in the level of real national output
i.e. a period when growth is negative, leading to a contraction
in employment, incomes and profits.
Definition: A fall in real GDP fortwo consecutive
quartersi.e. six months.
Aslumpor adepressionis a prolonged and deep recession
leading to a significant fall in output and average living
standards

Economic Cycles
Recovery
This occurs when real GDP picks up from
thetroughreached at the low point of the
recession.
The state of business confidence plays a
key role here. Any recovery might be
subdued if businesses anticipate that it will
be temporary or weak in scale.
A recovery might follow a deliberate
attempt to stimulate demand.

Managerial Decision
Analysis
The basic steps in Decision Making
are:
Define the Problem
Determine the Objective
Explore the Alternatives
Predict the Consequences
Make a choice
Perform sensitivity analysis

Managerial Decision
Analysis
Define the Problem: Managerial decisions
are not structured. They are poorly defined.
Hence, problem definition is a prerequisite for
problem management.
Determine the Objective: In most privatesector decisions, profit is the principal
objective of the firm and the usual barometer
of its performance. Thus, among alternative
courses of action, the manager will select the
one that will maximize the profit of the firm.

Managerial Decision
Analysis
Explore the Alternatives: Given
human limitations, decision makers
cannot hope to identify and evaluate all
possible options. Still, one would hope
that attractive options would not be
overlooked or, if discovered, not
mistakenly dismissed. Moreover, a sound
decision framework should be able to
uncover options in the course of the
analysis.

Managerial Decision
Analysis
Predict the Consequences:
Depending on the situation, the task
of predicting the consequences may
be straightforward or difficult.
Sometimes elementary arithmetic is
enough. For instance, the simplest
profit calculation requires only
subtracting costs from revenues.

Managerial Decision
Analysis
Make a choice: Once the decision maker
has put the problem in context, formalized
key objectives, and identified available
alternatives, how does he or she go about
finding a preferred course of action?
The decision maker determines the
preferred course of action by testing a
number of alternatives and selecting the
one that best meets the objective.

Managerial Decision
Analysis
Perform sensitivity analysis:
Sensitivity analysis considers how an
optimal decision is affected if key
economic facts or conditions vary.
The solution, to the problem depends
upon the stated objectives, the way
you structured the problem (including
the set of options you considered), and
the method of predicting outcomes.