Budget budget line is a graphical representation of all possible

combinations of two goods which can be purchased with given income

and prices, such that the cost of each of these combinations is equal to
the money income of the consumer

Characteristics of Managerial Economics:

 
(i) It studies the problems and principles of an individual business firm
or an individual industry. It aids the management in forecasting and
evaluating the trends of the market.
 
(ii) It is concerned with varied corrective measures that a management
undertakes under various circumstances. It deals with goal
determination, goal development and achievement of these goals.
Future planning, policy making, decision making and optimal utilization
of available resources, come under the banner of managerial
economics.
 
(iii)  Managerial economics is pragmatic. In pure microeconomic theory,
analysis is performed, based on certain exceptions, which are far from
reality. However, in managerial economics, managerial issues are
resolved daily and difficult issues of economic theory are kept at bay.
 
(iv) Managerial economics employs economic concepts and principles,
which are known as the theory of Firm or 'Economics of the Firm'. Thus,
its scope is narrower than that of pure economic theory.
 
(v) Managerial economics incorporates certain aspects of
macroeconomic theory. These are essential to comprehending the
circumstances and environments that envelop the working conditions
of an individual firm or an industry. Knowledge of macroeconomic
issues such as business cycles, taxation policies, industrial policy of the
government, price and distribution policies, wage policies and
antimonopoly policies and so on, is integral to the successful
functioning of a business enterprise.
 
(vi) Managerial economics aims at supporting the management in
taking corrective decisions and charting plans and policies for future.
 
(vii) Science is a system of rules and principles engendered for attaining
given ends. Scientific methods have been credited as the optimal path
to achieving one's goals. Managerial economics has been is also called a
scientific art because it helps the management in the best and efficient
utilization of scarce economic resources. It considers production costs,
demand, price, profit, risk etc. It assists the management in singling out
the most feasible alternative. Managerial economics facilitates good
and result oriented decisions under conditions of uncertainty.
 
(viii) Managerial economics is a normative and applied discipline. It
suggests the application of economic principles with regard to policy
formulation, decision-making and future planning. It not only describes
the goals of an organization but also prescribes the means of achieving
these goals.
 
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The Investors Book

Managerial Economics
October 27, 2018 By Priya C Leave a Comment

Definition: Managerial economics is a stream of management studies which

emphasises solving business problems and decision-making by applying the
theories and principles of microeconomics and macroeconomics. It is a
specialised stream dealing with the organisation’s internal issues by using various
economic theories.

Economics is an inevitable part of any business. All the business assumptions,

forecasting and investments are based on this one single concept.

Content: Managerial Economics

1. Nature
2. Types
3. Principles
4. Scope

Nature of Managerial Economics

 
To know more about managerial economics, we must know about its various
characteristics. Let us read about the nature of this concept in the following

points:

Art and Science: Managerial economics requires a lot of logical thinking and
creative skills for decision making or problem-solving. It is also considered to be
a stream of science by some economist claiming that it involves the application of
different economic principles, techniques and methods, to solve business
problems.

Micro Economics: In managerial economics, managers generally deal with the

problems related to a particular organisation instead of the whole economy.
Therefore it is considered to be a part of microeconomics.

Uses Macro Economics: A business functions in an external environment, i.e.

it serves the market, which is a part of the economy as a whole.

Therefore, it is essential for managers to analyse the different factors of

macroeconomics such as market conditions, economic reforms, government
policies, etc. and their impact on the organisation.

Multi-disciplinary: It uses many tools and principles belonging to various

disciplines such as accounting, finance, statistics, mathematics, production,
operation research, human resource, marketing, etc.
Prescriptive / Normative Discipline: It aims at goal achievement and deals
with practical situations or problems by implementing corrective measures.

Management Oriented: It acts as a tool in the hands of managers to deal with

business-related problems and uncertainties appropriately. It also provides for
goal establishment, policy formulation and effective decision making.

Pragmatic: It is a practical and logical approach towards the day to day business
problems.

Types of Managerial Economics

All managers take the concept of managerial economics differently. Some may be
more focused on customer’s satisfaction while others may prioritize efficient
production.

The various approach to managerial economics can be seen in detail below:

Liberal Managerialism

A market is a democratic place where people are liberal to make their choices and
decisions. The organisation and the managers have to function according to the
customer’s demand and market trend; else it may lead to business failures.

Normative Managerialism

The normative view of managerial economics states that administrative decisions

are based on real-life experiences and practices. They have a practical approach
to demand analysis, forecasting, cost management, product design and
promotion, recruitment, etc.

Radical Managerialism
Managers must have a revolutionary attitude towards business problems, i.e. they
must make decisions to change the present situation or condition. They focus
more on the customer’s requirement and satisfaction rather than only profit
maximisation.

Principles of Managerial Economics

The great macroeconomist N. Gregory Mankiw has given ten principles to explain
the significance of managerial economics in business operations.

These principles are classified as follows:

Principles of How People Make Decisions

To understand how the decision making takes place in real life, let us go through
the following principles:

People Face Tradeoffs

To make decisions, people have to make choices where they have to select among
the various options available.

Opportunity Cost

Every decision involves an opportunity cost which the cost of those options which
we let go while selecting the most appropriate one.

Rational People Think at the Margin

People usually think about the margin or the profit they will earn before investing
their money or resources at a particular project or person.

People Respond to Incentives

Decisions making highly depends upon the incentives associated with a product,
service or activity. Negative incentives discourage people, whereas positive
incentives motivate them.

Principles of How People Interact

Communication and market affect business operations. To justify the statement,

let us see the following related principles:

Trade Can Make Everyone Better off

This principle says that trade is a medium of exchange among people. Everyone
gets a chance to offer those products or services which they are good at making.
And purchase those products or services too, which others are good at
manufacturing.

Markets Are Usually A Good Way to Organize Economic Activity

Markets mostly act as a medium of interaction among the consumers and the
producers. The consumers express their needs and requirement (demands)
whereas the producers decide whether to produce goods or services required or
not.

Governments Can Sometimes Improve Market Outcomes

Government intervenes business operations at the time of unfavourable market

conditions or for the welfare of society. One such example is when the
government decides minimum wages for labour welfare.
Principles of How Economy Works As A Whole

The following principle explains the role of the economy in the functioning of an
organization:

A Country’s Standard of Living Depends on Its Ability to Produce

Goods and Services

For the growth of the economy of a country, the organisations must be efficient
enough to produce goods and services. It ultimately meets the consumer’s
demand and improves GDP to raise the country’s standard of living.

Prices Rise When the Government Prints Too Much Money

If there are surplus money available with people, their spending capacity
increases, ultimately leading to a rise in demand. When the producers are unable
to meet the consumer’s demand, inflation takes place.

Society Faces a Short-Run Tradeoff Between Inflation and

Unemployment

To reduce unemployment, the government brings in various economic policies

into action. These policies aim at boosting the economy in the short run. Such
practices lead to inflation.

Scope of Managerial Economics

Managerial economics is widely applied in organizations to deal with different

business issues. Both the micro and macroeconomics equally impact the business
and its functioning.
Following points illustrate its scope:

Micro-Economics Applied to Operational Issues

To resolve the organisation’s internal issues arising in business operations, the

various theories or principles of microeconomics applied are as follows:

 Theory of Demand: The demand theory emphasises on the consumer’s

behaviour towards a product or service. It takes into consideration the
needs, wants, preferences and requirement of the consumers to enhance the
production process.
 Theory of Production and Production Decisions: This theory is
majorly concerned with the volume of production, process, capital and
labour required, cost involved, etc. It aims at maximising the output to meet
the customer’s demand.
 Pricing Theory and Analysis of Market Structure: It focuses on the
price determination of a product keeping in mind the competitors, market
conditions, cost of production, maximising sales volume, etc.
 Profit Analysis and Management: The organisations work for a profit.
Therefore they always aim at profit maximisation. It depends upon the
market demand, cost of input, competition level, etc.
 Theory of Capital and Investment Decisions: Capital is the most
critical factor of business. This theory prevails the proper allocation of the
organisation’s capital and making investments in profitable projects or
venture to improve organisational efficiency.
Macro-Economics Applied to Business Environment

Any organisation is much affected by the environment it operates in. The

business environment can be classified as follows:

 Economic Environment: The economic conditions of a country, GDP,

economic policies, etc. indirectly impacts the business and its operations.
 Social Environment: The society in which the organisation functions
also affects it like employment conditions, trade unions, consumer
cooperatives, etc.
 Political Environment: The political structure of a country, whether
authoritarian or democratic; political stability; and attitude towards the
private sector, influence organizational growth and development.

Managerial economics provides an essential tool for determining the business

goals and targets, the actual position of the organization, and what the
management should do fill the gap between the two.

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Economics Discussion
5 Degrees of Price Elasticity of Demand
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Dr. Marshall has pro-founded the concept of price elasticity of demand. In simple
words, price elasticity of demand is the ratio of percentage change in quantity
demanded to the percentage change in price.

In other words, price elasticity of demand is a measure of the relative change in

quantity purchased of a good in response to a relative change in its price. It is
thus, rate at which the demand changes to the given change in prices.

So, we can say that it is the rate or the degree of response in demand to the
change in price.

ADVERTISEMENTS:

Therefore, the co-efficient of price elasticity of demand can be written

as below:
Definitions:
The concept of price elasticity of demand has been defined by
different economies as under:
“Elasticity of demand may be defined as the percentage change in quantity
demanded to the percentage change in-price.”

ADVERTISEMENTS:

“Elasticity of demand is the ratio of relative change in quantity to relative change

in Price.”

“ The elasticity of demand for a commodity is the rate at which quantity bought
change the price change.”

“The elasticity of demand is a measure of the relative change in quantity to a

relative change in price”.

“Elasticity of demand measures the responsiveness of demand to changes in

price”.

Degrees of Price Elasticity:

Different commodities have different price elasticity’s. Some commodities have
more elastic demand while others have relative elastic demand. Basically, the
price elasticity of demand ranges from zero to infinity. It can be equal to zero, less
than one, greater than one and equal to unity.

ADVERTISEMENTS:

“The elasticity or responsiveness of demand in a market is great or small

according as the amount demanded increases much or little for a given fall in
price and diminishes much or little for a given rise in price”.
However, some particular values of elasticity of demand have been
explained as under:
1. Perfectly Elastic Demand:
Perfectly elastic demand is said to happen when a little change in price leads to
an infinite change in quantity demanded. A small rise in price on the part of the
seller reduces the demand to zero. In such a case the shape of the demand curve
will be horizontal straight line as shown in figure 1.

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The figure 1 shows that at the ruling price OP, the demand is infinite. A slight rise
in price will contract the demand to zero. A slight fall in price will attract more
consumers but the elasticity of demand will remain infinite (e d=∞). But in real
world, the cases of perfectly elastic demand are exceedingly rare and are not of
any practical interest.
2. Perfectly Inelastic Demand:
Perfectly inelastic demand is opposite to perfectly elastic demand. Under the
perfectly inelastic demand, irrespective of any rise or fall in price of a commodity,
the quantity demanded remains the same. The elasticity of demand in this case
will be equal to zero (ed = 0).
In diagram 2 DD shows the perfectly inelastic demand. At price OP, the quantity
demanded is OQ. Now, the price falls to OP1, from OP, the demand remains the
same. Similarly, if the price rises to OP2 the demand still remains the same. But
just as we do not see the example of perfectly elastic demand in the real world, in
the same fashion, it is difficult to come across the cases of perfectly inelastic
demand because even the demand for, bare essentials of life does show some
degree of responsiveness to change in price.
3. Unitary Elastic Demand:
ADVERTISEMENTS:

The demand is said to be unitary elastic when a given proportionate change in the
price level brings about an equal proportionate change in quantity demanded.
The numerical value of unitary elastic demand is exactly one i.e. Marshall calls it
unit elastic.
In figure 3, DD demand curve represents unitary elastic demand. This demand
curve is called rectangular hyperbola. When price is OP, the quantity demanded
is OQ\. Now price falls to OP1 the quantity demanded increases to OQ2. The area
OQ\RP = area OP\SQ2 in the fig. denotes that in all cases price elasticity of
demand is equal to one.
4. Relatively Elastic Demand:
Relatively elastic demand refers to a situation in which a small change in price
leads to a big change in quantity demanded. In such a case elasticity of demand is
said to be more than one (ed > 1). This has been shown in figure 4.
ADVERTISEMENTS:

In fig. 4, DD is the demand curve which indicates that when price is OP the
quantity demanded is OQ1. Now the price falls from OP to OP1, the quantity
demanded increases from OQ1 to OQ2 i.e. quantity demanded changes more than
change in price.’
5. Relatively Inelastic Demand:
Under the relatively inelastic demand, a given percentage change in price
produces a relatively less percentage change in quantity demanded. In such a
case elasticity of demand is said to be less than one (ed < 1). It has been shown in
figure 5.
 ADVERTISEMENTS:

All the five degrees of elasticity of demand have been shown in figure 6. On OX
axis, quantity demanded and on OY axis price is given.

It shows:
1. AB — Perfectly Inelastic Demand

2. CD — Perfectly Elastic Demand

ADVERTISEMENTS:

3. EG — Less than Unitary Elastic Demand

4. EF — Greater Than Unitary Elastic Demand

5. MN — Unitary Elastic Demand.

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2. 5 Types of Price Elasticity of Demand – Explained!
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4. Degrees of Price Elasticity of Demand | Hindi | Economics
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