INTRODUCTION TO MANAGERIAL

ECONOMICS

PROF. V. R . KISHORE KUMAR,

M.A(Q.E.)(MPhil.)
INDEX
 Introduction
 Definition of Economics and Managerial Economics
 Scope of Managerial Economics
 Basic Economic Problems
 The Firm
 Role of a Managerial Economist
 Decision making areas
 Steps in decision making
 References
 INTRODUCTION
Emergence of managerial economics as a separate curse of
management studies can be attributed to at least three factors
b) Growing complexity of business decision making process
due to changing market conditions and business
environment
c) The increasing use of economic logic, conceptual theories
and tools of economic analysis in the process of business
decision making process
d) Rapid increase in demand for professionally trained
managerial manpower
DFINITIONS OF ECONOMICS AND
MANAGERIAL ECONOMICS
ECONOMICS: Economics is a social science . Its basic
function is to study how people – individual house
holds, firms and nations maximizing their gains from
their limited resources and opportunities.

 In economic terminology it is called as “maximizing

behaviour” or more approximately “optimizing
behaviour” .

 Optimization means selecting best out of available

resources with the objective of maximizing gains from
given resources.
 Economics is thus 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.
The origin of the subject could be traced from the works of the

Greek philosopher Aristotle who confined the study of

economics to household management and acquiring, guarding

and making proper use of wealth.

The term economics is derived from two Greek words

“OIKOS”(a house) and “NEMEIN”(to manage).

Prof. Samuleson remarks economics as “the oldest of arts and

newest of science, indeed the queen of the social science.

Definitions of Economics:
Wealth Definition- Adam Smith, J.B.Say, J.S.Mill

etc.(Classical definition)

Welfare Definition- Marshall, A.C.Pigue etc.(Neoclassical

definition)

Scarcity definition- Robbins

Growth Definition- Paul A Samuelson Moderndefinition

 Managerial Economics
Managerial economics can be broadly defined as
the study of economic theories, logic and tools
of economic analysis that are used in the
process of decision making. Economic theories
and techniques of economic analysis are applied
to analyze business problems, evaluate business
options and opportunities with a view to arriving
at an appropriate business decision.
Douglas : Managerial economics is concerned
with the application of economic principles and
methodologies to the decision making process
within the firm or organization. It seeks to
establish rules and principles to facilitate the
attainment of the desired economic goals of the
management.
Mansfield : He defines that managerial economics is
concerned with the application of economic
concepts and economic tools to the problems of
formulating rational decision making.
Spencer and Seigleman : It is the integration of
economic theory with business practice for the
purpose of facilitating decision making and
forward planning by management
Economic Theory and Managerial Theory
Economic Theory Managerial Theory

1. It deals with the application of certain

1. It deals with the body principles
principles to solve the problem of a
2. It has the characteristics of both
firm
micro and macro economics
2. It has only micro characteristics
3. It deals with a study of individual
3. It deals with the study of only profit
firm and individual consumer
theories
4. It based on certain assumptions
4. In managerial theory assumptions
5. It studies economic aspects of the
disappear due to practical situations
problem
5. It studies both economic and non-
economic concepts.
Scope of Managerial Economics
Economics has two major branches
1. Micro Economics
2. Macro Economics
The term Micro means small and Macro means
big.Both are applied to business directly or indirectly.
managerial economics comprises both micro and
macro economic theories. The parts of micro and
macro economics that constitute managerial economics
depend on the purpose of analysis.
The scope of M.E. comprises all the
economic concepts, theories and tools of
analysis which can be used for analyse
the issues related to demand ,
production and cost, market structure
etc.,

In other words managerial economics is

economics applied to analysis of
business problems and decision making
. Broadly it is applied economics
Micro-economics applied to internal issues :
Operational issues are of internal nature. Internal issues include
all those problems which arise within the business organization
and fall within purview and control of the management .
Some of the basic internal issues are :
ØWhat to produce
ØHow much to produce
ØChoice of technology i.e. choosing of the factor –combination
ØChoice of price i.e. how to price the commodity
ØHow to promote sales
ØHow to face the price competition
ØHow to decide on new investments
ØHow to manage capital and profit
ØHow to manage inventory i.e. stock of both
finished goods and raw material
Most of the micro economic problems deals with
most of these questions.
ØThe Law Demand
ØThe Theory of Production
ØAnalysis of Market Structure and Pricing
Theory
ØProfit analysis and management
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.
ØTheory of Capital and Investment Decisions
Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
etc.
Macro-economics deals with external issues :
üThe type of economic system in the country
üGeneral trends in N.I., employment, prices, savings and
investments
üStructural change in the working financial institutions
viz., banks, insurance companies etc
üMagnitude of and trends in foreign trade
üTrends in labour supply and strength of capital market
üGovernment’s economic policies i.e., industrial,
monetary, fiscal, price and foreign etc.
üSocial factors viz., value system of the society,
property rights, customs and habits etc.,
üPolitical environment i.e., democratic, authoritarian,
socialist political systems, or state attitude towards
private business man etc.
These Environmental factors have a far-reaching
bearing upon the functioning and performance of the
firms. Therefore, decision makers have to take in to
account the present and future economic, political and
social
Conditions in the country and give due consideration
to the environmental factors in the process of decision
making.
Eg: SEZ in the Nandigram, Tata’s small car in Singur
district in West Bengal
BASIC ECONOMIC PROBLEMS

 WHAT TO PRODUCE ?

 WHERE TO PRODUCE ?

 HOW TO PRODUCE ?

 WHOOM TO PRODUCE ?
 THE FIRM
 Meaning :
The basic unit for obtaining production which
performs crucial role of linking product, factor and
money markets.
It is an administrative organization, utilising a pool
of resources.
A business organization under a single management
with one or more establishments.
FIRMS,INPUTS AND
OUTPUTS
Role 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
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.
DECISION MAKING AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.
“Decision making and processing information are two
important tasks of managers”
In order to make good decisions managers must be able
to obtain, process and use information.
DEMAND FORECASTING
 PRODUCTION PLANNING AND COST
REVENUE DECISIONS
Production Function :
The production function is a technological
relationship between output and various inputs used
in production viz., land, labour, capital and
technology.
The output depends on the increasing function of
all the factor inputs
Q=f(S,L,K,T)
The following types of cost are useful in the
decision areas
Average, Marginal and Total Costs
Fixed and Variable Cost
Direct and Indirect Cost
Replacement and Original Cost
Opportunity and Industrial Cost
Sunk Cost and Outlay Cost
STUDY OF ECONOMIC ENVIORNMENT
Economic environment is the most significant
component of the business environment. It affects the
survival and success of a business organization.
PRICING AND RELATED DECISIONS
The Price-output decisions are taken under various market
structures. The structure of the market refers to the degree
of competition in the market for the firms goods and
services.
 INVESTMENT DECISION
Business firms invest large money in their
projects. Therefore, capital expenditure for
different project proposals compete within
themselves for their claim on scarce resources.
Generally , in business sector itself, individual
firms compete against access to financial
resources and scares .
The investment decisions are important as
vNot easily reversible
vGenerally involves large sums of money
vHighly futuristic and future is full of uncertainty
vLong gestation periods
Thus, careful financial appraisal of each project
involves larger investments. Due to above reasons,
capital decisions fall in the category of investment and
known as “capital budgeting decisions” made by
highest level of management.
STEPS IN DECISION MAKING
Managerial economics is concerned with decision

making at the level of firm. These decisions have far

reaching effects on the firm. Delay in taking decisions

or implementing decisions might turn in to losses.

Various steps in the decision making by a business firm

are as fallows :
REFERENCES

3. MANAGERIAL ECONOMICS --
D.N.DWIVEDI
2. BUSINESS ECONOMICS --
D.D. CHATURVEDI
S.L. GUPTA
SUMITRA PAUL
11. MICRO ECONOMICS --
JHON KENNADY
14.MANGERIAL ECONOMICS –
MITHANI
THANK YOU