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Managerial Economics is indeed an off-shoot

of the Second World War. Before the outbreak
of this war, the study of economics was purely
an academic exercise, while business was a
pure practice based on common practical
sense of human mind. The Second World War
created a tremendous pressure on scarce
economic resources of the world. Thus, the
need for optimum utilization of resources
intensified further, which ultimately gave birth
to a new discipline popularly known as
Managerial Economics.
MEANING AND DEFINITION
The terms Managerial Economics and
Business Economics are often synonyms and
used interchangeably in managerial studies. It
is also known as Economics for Managers.
Basically, Managerial Economics is an Applied
Economics in the sphere of business
management. It is an application of economic
theory and methodology to decision-making
problems faced by the business firms. Thus, it
is the economics of business or managerial
decisions or it is the process of application of
principles, concepts and techniques 2 and tools
of economics to solve the managerial problems
of business organizations. Some important
definitions of Managerial Economics are given
below :
Managerial Economics is economics applied
in decision-making. It is a special branch of
economics bridging the gap between the
economic theory and managerial practice. Its
stress is on the use of the tools of economic
analysis in clarifying problems in organizing
and evaluating information and in comparing
alternative courses of action. -W. W. Haynes
By analyzing the definitions of managerial
economics given above, we come to the
conclusion that managerial economics is the
study of economic theories, logic, concepts and
tools of economic analysis that are used in the
process of business decision-making by the
business managers in taking rational, correct
and timely decisions. Managerial Economics is
that part of economic theory which, in general,
is concerned with business activities and in
particular, concerned with providing solutions
to problems arising in decision-making of
business organizations. Indeed, it is an

integration of economic theory and business

practices

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Characteristics of Managerial Economics
It involves an application of Economic theory
especially, micro economic analysis to practical
problem solving in real business life. It is
essentially applied micro economics.
It is a science as well as art facilitating better
managerial discipline. It explores and enhances
economic mindfulness and awareness of
business problems and managerial decisions.
It is concerned with firms behaviour in
optimum allocation of resources. It provides
tools to help in identifying the best course
among the alternatives and competing
activities in any productive sector whether
private or public.
Micro economic analysis: The main part of
the study of managerial economics is the
behaviour of business firm/s, which is micro
economic
unit.
Therefore,
managerial
economics is essentially a micro economic
analysis. Under the study of managerial
economics, the problems of firm are analyzed
and solved through the application of economic
methods and tools. It does not study the whole
economy
. Economics of the firm: According to Norman
F. Dufty, Managerial Economics includes, that
portion of Economics known as the theory of
firm, a body of the theory which can be of
considerable assistance to the businessman in
his decision-making. For instance, the study of
managerial economics includes the study of
the cost and revenue analysis, price and output
determination,
profit
planning,
demand
analysis and demand forecasting of a firm. As
already stated earlier, the another name of
managerial economics is Economics of the
Firm.
The concepts of economic theory that are
widely used in managerial economics are the
following:
Demand and Elasticity of demand
Demand forecasting

 Production Theory
Cost Analysis
Revenue Analysis
Price determination under different market
conditions/structures
Pricing methods in actual practice Breakeven analysis Linear Programing Game
Theory
Product and Project Planning Capital
Budgeting and Management Criteria for
public investment decisions

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NATURE OF MANAGERIAL ECONOMIC
Generally, it is believed that Managerial
Economics is a blend of science and art
because on one hand, it is a systematic study
of economic concepts, principles, methods &
tools, which are used in business decisionmaking process and on the other hand, it is the
study of how these are used and applied in
best possible manner in analyzing and solving
business problems. In fact, science is a
knowledge acquiring discipline, whereas arts is
a knowledge applying discipline.
Business ethics forms the core of managerial
economics as cultural values, social customs
and religious sentiments of the people coin the
normative aspect of business activities. These
things matter in designing production pattern
and planning of the business in a country/area.
For
instance,
a
modern
multi-national
corporation has to consider the socio-cultural
and religious moods / sentiments of the people
before launching its product. The main purpose
is not to hurt the sentiments of the people but
to promote the well-being of the people along
with business. Thus, we can conclude by
saying: 6
Managerial economics is a science as well as
an art.
Managerial economics a positive and
normative science both.
Being of the determinative/perspective
nature, the focus is on what should be or
business decisions are based an value
judgment considering the beneficial and
harmful aspects of such decisions.
SCOPE MANAGERIAL ECONOMIC

Economics has two major branches namely

Microeconomics and Macroeconomics and both
are applied to business analysis and decisionmaking directly or indirectly. Managerial
economics comprises all those economic
concepts, theories, and tools of analysis which
can be used to analyze the business
environment and to find solutions to practical
business problems. In other words, managerial
economics is applied economics The areas of
business issues to which economic theories can
be applied may be broadly divided into the
following two categories: Operational or
Internal issues; and Environmental or
External issues Micro Economics Applied to
Operational Issues Operational problems are of
internal nature. They arise within the business
organization and fall within the preview and
control of the management. Some of the
important ones are: Choice of business and
nature of product, i.e., what to produce;
Choice of the size of the firm, i.e., how much to
produce; Choice of technology, i.e., choosing
the factor combination; Choice of price, i.e.,
how to price the commodity.
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DEMAND ANALYSIS
Elastic of demand
Elasticity of Demand- Relatively elastic demand
where a change in price leads to more than
proportionate change in demand Ed>1Ed>
1 - Relatively inelastic demand - where a
change in price leads to less
than proportionate increase in demand. Ed<1E
Unity elastic - where a given proportionate change in
price leads to proportionate change in demand. Ed = 1Ed
Perfectly elastic demand- where a small change in price
leads to big or infinite change in demand
Perfectly Inelastic- where a change in price causes no
change in-quantity demanded.
Factors determining the Elasticity of demand.Factors
determining the
.i) Nature of the commodity The demand for necessities
is generally inelastic because thenecessities is generally
inelastic
consumption of necessary article does not
change significantly with the change in the price. Pr
ii) Range of substitutes- A commodity having number of
substitutes- has relatively elastic demand because if the

price rises its consumption can be curtailed in favor of its

substitutes.of its substitutes.
iii) Income level people with high income are less affected
than the people with low income.

iv) Proportion of income spent on the commodity. When a

person spends only a small part of his income on the
commodity price changes does not affect his demand for
the commodity.nct
Durability of the commodity- In case the commodity is
durable or repairable, if the price rises considerably, one
is likely to use the commodity for a longer period.

Shift in Demand- In economics a shift in demand

means an increase in demand or decrease in demand at a
given price level. - An increase in demand means that at the
same-series of prices as before, increased quantities are
demanded.
Factors that causes shifts in the demand t
- Change in income- Change in tastes, preferences, fashion- Change in population- cha