Unit 1 :Basic Concepts and

principles- Managerial Economics and its

relevance in business decisions.

Course Code: KMB 102

Faculty: Ms. Avneet Kaur
Managerial
Economics
Nature , scope and importance- Micro and
Macro Economics
Managerial Economics

• ME is that part of economic theory which deals with the application of

economic tools and concepts to the solution of business problem or the
problem of resources for unlimited wants .
• - According to Edwin Mansfield ,
• managerial economics is concerned with the ways in which managers should make decisions in
order to maximize the effectiveness or performance of the organizations they manage”

• According to D.C Hauge,

• ME is a fundamental academic subject which seeks to understand and to analyse the problems of
managerial decision making
Nature of Managerial Economics

• It refers to the application of economic theory and decision science tools to find
the optimal solution to managerial decision problems.

•
Economics v/s managerial economics

• Economics- concerned with the problem of allocation of resources for unlimited

wants.

• Managerial economics :
• applies these tools and concepts to the management of business
• Concerned with allocation of resources available to a firm among its activities.
• It is the application of economics in decision making., always goal oriented.
Economics v/s Managerial Economics
Economics
• Deals with the body of principles
• Includes Micro and Macro both
• Economics is both positive and
normative in nature
• Scope of economics is wider than ME
• Builds economic relationship and
economic models .
Managerial Economics
• Deals with the application of
economic principles
• Part of Micro Economics
• ME is normative (Value judgement)
• Scope is narrow
• Adopts, modify and reformulate
economic models to suit specific
conditions.
Features of Managerial Economics

• Concerned with decision making of economic nature

(identification of economic choices and allocation of scarce
resources.

• ME is goal oriented and prescriptive (deals with how decisions

should be made by managers to achieve organizational goals)
Features of Managerial Economics

• ME is pragmatic ( avoids difficult abstract issues of economic

theory, concerned with those analytical tools which are useful
in improving decision making )
• (Pragmatic): dealing with things sensibly and realistically in a
way that is based on practical rather than theoretical
considerations.

• ME is both conceptual and metrical ( take the help of

conceptual framework to understand and take the help of
quantitative techniques to measure the impact)
Features of Managerial Economics

• ME helps in making wise choices – Managers continues to

face the problem of scarcity, - unlimited wants with limited
resources .

• Multi disciplinary- related with different disciplines statistics,

management , operation research , mathematics and
psychology .
Features of Managerial Economics

• Managerial economics is micro economic in character , where the unit of

study is a firm.

• Managerial economics is concerned with normative micro economics –

not with positive micro economics
• Note : positive economics: concerned with what is, was and will be
• Normative approach : what ought to be
• Eg: a govt deficit will reduce unemployment and cause an increase in
prices. – positive statement
• In setting policy , unemployment ought to matter more than inflation. –
normative statement
Features of Managerial Economics

• ME tells us that what objectives a business firm should pursue and

how they should be set.

• ME concentrates on making economic theory more application

oriented .

• Managerial economics takes the help of macro economics (deals with

external conditions which are relevant to business working conditions.
3 combinations of ME

• Micro economic theory (to provide tools and techniques used

in decision making )
• Macro economic theory
• Decision sciences (like operations research to enable well
informed decisions )

• Constitutes managerial economics when applied to provide

solutions to decision making situations faced by managers .
Integration of Economic Theory and Business
Practice

• With the help of economic theory we can understand actual behavior of

business.

• Managerial economics attempts to estimate and predict the economic

quantities and relationships.
• Decision making and forward planning is done with the help of
estimated economic quantities and relationships.
• The Managers cannot ignore the environment in which they operate.
Scope of Managerial Economics

I. What to produce?
II. How to produce?
III. For whom to produce?
Scope of Managerial Economics

• Managerial economics deals with 4 problems:

• Resource allocation for optimal results

• Inventory and queuing problem

• Pricing problems( fixing the prices of the product)

• Investment problems ( forward planning regarding allocation of scarce

resources over time)
Scope of Managerial Economics

• Theory of demand analysis and forecasting –

• Demand analysis covers demand determination , demand distinctions

and demand forecasting
• Demand analysis theory explains the consumer behavior (how
consumers decide whether or not buy a commodity , how they decide
the quantity ,taste , fashion , change)
Scope of Managerial Economics

• Theory of production and production decisions –

• Production theory also called theory of firm , explains the relationship
between inputs and outputs
• It also explain under what conditions costs increases or decreases
Scope of Managerial Economics

• Theory of market structure and pricing theory (how prices are

determined under different market conditions.)

• Cost analysis(methods of estimating costs, relationship between cost and

output )
• Profit analysis and profit management (DD for product, input prices ,
degree of competition etc )
Scope of Managerial Economics

• Theory of capital and investment decisions (choice of

investment project , assessing the efficiency of capital, most
efficient allocation of resources )
Scope of Managerial Economics

• Inventory management ( it refers to the raw material or finished goods

which a firm keep with itself
• How much inventory would be the ideal stock ??
• Managerial economics will try to find out whatever is likely to be the
best for the firm under a certain set of conditions.
Positioning ME in the big picture

• Decisions taken up by managerial economics are all taken in two markets

–

• Factor market (includes factors or resources used for production but

owned by households are exchanged.

• Product market (where the products produced are exchanged)

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).
•Managerial Economics and its
Relevance in Business Decisions
Role of Managerial Economics

• Use of analytical tools and techniques of Economics that are useful for business
decision making
• To move towards Economic Choice- the Rationale choice towards optimization

Economic Theory
Business Business Optimal
Decision Economics Business
Problems Decision
Sciences: tools
and Techniques
Significance in decision making and fundamental
concepts

• Estimating economic relationship : important role in business planning

and decision making by estimating an economic relationship between
different business factors such as income , elasticity of demand and
supply , cost volume profit analysis.
Significance in decision making and fundamental
concepts

• Predicting various economic quantities : sound business plans

and policies are formulated on the basis of economic
quantities ,
• Me helps in predicting various economic quantities such as
cost, profits, expected demand , price and production
Significance in decision making and fundamental
concepts

• Understanding significant external forces: identify all important factors

that influences a firm
• These factors are of two types – internal and external , external factors
are beyond the control of a firm therefore, plans and policies are
adjusted according to these factors
• Ex- business cycles, industrial policy, fiscal policy, taxation
Significance in decision making and fundamental
concepts

• Helpful in making choices :

• ex: Travel by bus or car to reach Delhi
• Whether to produce rice or wheat
• Me helps in making such choices with the help of analysis and strategic
management
 ECONOMIC CONCEPTS USED IN 
MANAGERIAL ECONOMICS

• (1) the theory of the firm, which describes how businesses make a variety of decisions;
• (2) the theory of consumer behavior, which describes decision making by consumers; and
• (3) the theory of market structure and pricing, which describes the structure and characteristics of different market forms under
which business firms operate.

• THE THEORY OF THE FIRM

• Firms exist because they perform useful functions in society by producing and distributing goods and services.
• they use society's scarce resources, provide employment, and pay taxes.
• If economic activities of society can be simply put into two categories—production and consumption—firms are considered the
most basic economic entities on the production side, while consumers form the basic economic entities on the consumption side.
• The behavior is usually analyzed in the context of an economic model, an idealized version of a real-world firm. T
• he basic economic model of a business enterprise is called the theory of the firm.
Role and responsibilities of managerial economist

• Who is a managerial economist ???

• A managerial economist can play a very important role by assisting the
management in using the increasingly specialized skill and sophisticated
techniques which are required to solve the difficult problems of
successful decision making and forward planning.
Role of managerial economist

• 1. Environmental studies:
• An analysis and forecast of external factors constituting general business
conditions are of great significance since every business firm is affected by
them.
• Certain important relevant questions in this connection are as follows;
• What is the outlook for the national economy?
• what are the most important economic trend?
• What phase of the business cycle lies immediately ahead?
• What about population shift and resultant ups and downs in regional
purchasing power?
Role of managerial economist

• What are the demand prospects in new as well as established markets?

• Where are the market and customer opportunities likely to expand or contract
most rapidly?
• What the prices of raw materials and finished products are likely to be?
• Is competition likely to increase or decrease?
• What are the main components of the five year plan?
• What is the outlook regarding government’s economic policies and regulations
2.Business operation

• A managerial economist can also be helpful to the management in making

decision relating to the internal operations of a firm in respect of such problem
as price, rate of operations, investment, expansion or contraction.
• Certain relevant questions are;
• What will be a reasonable sales and profit budget for the next year?
• What will be the most appropriate production schedules and inventory policies
for the next six month?
• What changes in wage and price policies should be made now?
• How much cash will be available next month and how should it be invested?
3.Specific functions

• Managerial economist can play the following specific functions are;

• Sales forecasting
• Industrial market research
• Economic analysis of competing companies
• Pricing problem of industry
• Capital projects
• Production programmes
• Security or investment analysis
• Advice on trade and public relations
• Advice on foreign exchange
• Economic analysis of agriculture
• Analysis of underdeveloped economies
• Environmental forecasting
4.Economic intelligence 

• Managerial economist may also provide general intelligence service

supplying management with economic information of general interest.

• In fact, a good deal of published material is already available and it

would be useful for a firm to have someone who understands it.
5.Participating in public debates

• Many well known business economist participate in public

debate.
• Their advice and views are being sought by the government
and society alike.
• Their practical experience in business and industry adds
stature to their view.
Conclusion

• Managerial economist is expected to perform the following functions;

• Macro forecasting for demand and supply
• Production planning at micro and macro level
• Capacity planning and product mix determinations
• Economics of various production line
• Economics feasibility of new production lines or processes and projects
• Assistance in preparation of overall development plans
• Preparation of periodical economic reports bearing on various matters
• Preparing briefs, speeches, articles and papers for top management for
various chambers, committees, seminars, conferences.
Responsibilities of a managerial economist

• Managerial Economist has a significant role in managerial decision making.

• His responsibilities are

• Maximization of Profit.
• To alert management if there is an error in forecast.
• Establish and maintain many contacts with individuals and data sources.
•  To keep the management informed of the economic trends.
• He must be able to earn full status on the business team
Conclusion

• A managerial economist has a very important role to play by helping the

management in successful decision making and forward planning. But to
discharge his role successfully, he must recognize his responsibilities and
obligations. Managerial economists can contribute significantly to the profitable
growth of firms and effective solution of their problems.
Managerial Economics – Normative or Positive

• Positive Economics explains the economic phenomenon as : what is, what was
and what will be.
• Normative Economics prescribes what is ought to be.

• Managerial Economics is a blending of pure or positive Science with applied or

normative science. It is positive when it is confined to statements about causes
and effects and to functional relationships of economic variables.
• It is normative when it involves norms and standards, mixing them with cause
and effect analysis.
Scope of Managerial Economics

• Demand Function and Estimation

• Demand Elasticity
• Demand Forecasting
• Production function and Laws
• Cost Analysis
• Pricing and output determination in different markets structure such as perfect
competition, monopoly , Monopolistic and oligopoly.
• Pricing policies and Practices in Real Business
• Profit Planning and Management
• Project Planning and Management
• Break Even Analysis
REFERENCES

• Dwivedi, D N(2015), Managerial Economics (8th ed),India: vikas publishing house pvt. Ltd.
• Mithani, D M (2013), Managerial Economics: Theory & Application(7th ed.), India: Himalaya Publishing House
• Thomas, Christopher R and Maurice, s Charles (2008), Managerial Economics :concepts & Application (7th ed.), India: Mc
Graw hill Irwin
• Kumar Raj and Gupta Kuldip (2005), Managerial Economics, India: DH publishers & Distributors
• Ahuja, H L (2017), Managerial Economics: Analysis of Managerial Decision Making(9th ed.), India: S chand Company Ltd.
• Geetika(2017), Managerial Economics(3rd ed.), India: Tata Mc Graw Hill Education Pvt Ltd.

• Suggested Magazines :
• Economic and Political Weekly
• Reserve Bank of India Bulletin
• For Addition : Video Lectures : http://www.vutube.edu.pk/vu-lectures/viewcategory/116/economics-eco401

• Web Links :
• http://www.referenceforbusiness.com/encyclopedia/Man-Mix/Managerial-Economics.html#ixzz5K5heQazy