Learning objectives


Introduction to economics
Emergence of managerial economics
 meaning and definition
Important characteristics of ME
Scope of managerial economics
Role & responsibility of managerial
economist
Decision making process in ME.
 Introduction to economics

 Economic is a social science.
Its basic function is to study the human behaviour
in relation to get maximum gain with the limited
resource available.
The analytical tools & techniques, economic laws &
theories constitute the body of the economics.
 Emergence of managerial
economics

 The three important factors responsible for the
creation of managerial economics.
 Growing complexity of business.
 Increasing use of economic concepts theories &
economic analysis in the process of decision making
process.
 Rapid increase in demand for professionally trained
managerial manpower.
 Meaning & Definition of
M.E.

Meaning:
Managerial economics is the study of economic
theories & tools of economic analysis that are used in
the process of business decision making.
In other words it is a disciplines which deals with the
application of economy theory to business
management.
Managerial economics serve as a bridge between the two
disciplines i.e.
Economics & Business management.

Economics theory Business Management
& methodology Decision making

Managerial economics application

of economics to solve business
problem

Optimal solutions to business problems

 Definition:

 Mansfield:
“ Managerial economics is concerned with
the application of economics concepts &
economics to the problem of formulating rational
decision making”.
Spencer & seigelmen:
“ M.E is the integration of economic theory with
business practice for the purpose of facilitating
decision making & forward planning by
management.”
 Characteristics of
managerial economics

 Managerial economic is micro- economic in
character.
 Uses theory of the firm.
 M.E is pragmatic that considers the particular
environment of decision making.
 M.E belongs to normative economics or
prescriptive rather than descriptive & hence
involve value judgment.
 M.E also make use of macro economics in
understanding the environment in which the
business operate.
 Scope of Managerial
Economics

Economics has two major branches:-
Micro economics
Macro economics
M.E is applied economic used to analyze & solve
business problem.
The area of business issues to which economic theories
can be directly applied can be divided into two
categories.
Business Environment Issues

External issues/ Macro issues.

Internal issues/Micro
issues
 Micro economics applied
to operational issues

Micro economics applied to operational issues:

Operational issues or problem are the internal in

nature. They include all those problems which arise
within the business organization & falls within the
purview & control of the management.
Internal issues are:

Choice of business & the nature of the
product I.e. what to produce.
Choice of size of the firm I.e. how much to
produce
Choice of technology
Choice of price
How to promote sales.
How to face price competition
How to decide on new investments
Hoe to mange the profit & capital
How to mange inventory
Theory of demand:

 Demand theory explains the consumer behaviour
 Demand analysis helps identify the various factors
influencing the demand for a firms produce.
 It helps for business strategic planning
 Theory of production &
Production Decision:

Production theory also known as “:Theory of
firm”
This explains the relationship between inputs
& outputs.
Explains the condition under which cost
increase or decrease.
It helps in determining the size of the firm,
size of total output & the amount of capital &
Labour to be employed.
 Analysis of market –
Structure & Pricing

theory:
 Pricing is a very important area of M.E
 Price theory explains how price discrimination is
desirable, feasible & profitable.
 To what extent advertising can be helpful in
expanding sales in a competitive market.
 Profit analysis & profit
management

 The primary objective of business is profit making
 The theory guides firms in the measurement &
management of the profit.
 It helps in future planning.
 Theory of capital &
Investment decisions:

Capital is the foundation of business.
Capital management implies planning &
control of capital expenditure.
Capital theory contribute a great deal in
investment decision making.
The major issues relate to capital are:
Choice of investment project
Assessing the efficiency of capital &
allocation of capital.
 Macro Economics applied to business
environment

 Environmental issues pertain to the general business
environment in which a business operates.
 They are related to overall economic, social & political
atmosphere of the country.
 Economic environment:
 The factors which constitutes economic environment.
 The type of the economic system of the country.
 General trends in production, employment, income, price,
savings & investment.
 Government economic policy E.g industrial policy, Monetary
policy.
 Financial institution structure & there working.
Social factors like value system of the society,
property rights, customs & habits.
Social organisation like trade unions, consumer, co-
operatives etc

Political environment like political system,
democratic, authoritarian, socialist states attitude
towards private business, size & working of the public
sectors, political stability & MNC’s influence on
domestic markets.
However the economic, social & political factors are
treated as business parameters.
M.E is concerned with only the economic environment
factors which form the business climate.
However the manger of a firm supposed to be fully
aware of all factors while taking decisions.
Role & Responsibility of
managerial economists

Managerial economics contribute to a great
deal towards the performance of managerial
duties & responsibilities.
A managerial economists can play a very
important role by assisting the management
in using the skills & techniques which are
required to solve the difficult problems for
successful decision making & forward
planning.
 Role of Managerial
economist

 To study economic trends at the macro- level & also interpret
their relevance to the particular industry/firm where he
works.
 He act as a bridge between government & industry.
 Always to be helpful to the management in decision making,
 He has to gather economic data analyze all information about
the business environment.
 Managerial economist must undertake detailed statistical
analysis & perform many varied functions.
 Managerial economist provide general intelligence service
supplying management with economic information.
 Responsibilities of a
managerial economist

Keep in
Recognize Good contact
Serve to Alert mind
his role & With Data
organization management the firms
obligation source
objective
 Decision making process
in M.E
 is essentially a process of
Business decision making
selecting the best out of alternative opportunities
open to firm.
Determining & defining the objectives to be
achieved
Collections & analysis of information ( regarding
economic, social, political & technological
environment.
Inventing, developing & analyzing possible course
of action.
Selecting a particular course of action from the
available alternatives.
 
Suppose a firm plans to launch a new product for
which close substitutes are available in market.
One method to deciding whether or not to launch
the product.
Get the opinion from a business consultant or
manager can analyze & investigate thoroughly
The production related issues
The sales prospects & problems.
Production related issues Sales prospects &
problems
Available techniques of General market trends
production
Cost of production Prices of competing
product
Supply position of input Pricing strategy

Price structure of input Market structure

Cost structure of
competitive products
 
The economic theories & tools of economic analysis
aid the process of decision making in three ways.
Understanding the various economic concepts.
Relevant data
Stating relationship between two or more economic
variables.
 

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