THE NATURE

AND SCOPE OF
MANAGERIAL
ECONOMICS
AGUINALDO, NICHOLAS ERLICH J. GARZON, ANGELINE G.

NOBLEJAS, ANDRE NICOLO L. VISERA, CHRIS BELLE A.

GROUP 1
DEFINITION OF MANAGERIAL ECONMICS
TABLE OF
NATURE OF MANAGERIAL ECONOMICS CONTENTS
CONCEPTS OF MANAGERIAL ECONOMICS

IMPORTANCE OF MANAGERIAL ECONOMICS

PRINCIPLES OF MANAGERIAL ECONOMICS

SCOPE OF MANAGERIAL ECONOMICS

DEFINITION AND NATURE
OF MANAGERIAL
ECONOMICS
GARZON, ANGELINE G.
Managerial economics is a stream of management
studies that emphasizes primarily solving business
problems and decision-making by applying the theories
and principles of microeconomics and
macroeconomics. It is a specialized stream dealing with
WHAT IS
an organization’s internal issues by using various MANAGERIAL
economic theories. Economics is an indispensable part ECONOMICS?
of any business. All the business assumptions,
forecasting, and investments are derived from this
single concept.
 ART AND SCIENCE
Management theory requires a lot of critical and logical thinking
and analytical skills to make decisions or solve problems. Many
economists also find it a source of research, saying it includes
applying different economic concepts, techniques and methods
NATURE OF to solve business problems.

MANAGERIAL
ECONOMICS MICROECONOMICS
In managerial economics, managers typically deal with the
problems relevant to a single entity rather than the economy as a
whole. It is therefore considered an integral part of
microeconomics.
 USES MACRO ECONOMICS
A corporation works in an external world, i.e. it serves the
consumer, which is an important part of the economy. For this
purpose, it is important that managers evaluate the various
macroeconomic factors such as market dynamics, economic
NATURE OF changes, government policies, etc., and their effect on the
company.
MANAGERIAL
ECONOMICS MULTIDISCIPLINARY
It uses many tools and principles that belong to different
disciplines, such as accounting, finance, statistics, mathematics,
production, operational research, human resources, marketing,
etc.
 PRESCRIPTIVE AND NORMATIVE DISCIPLINE
By introducing corrective steps it aims at achieving the objective
and solves specific issues or problems.

NATURE OF MANAGEMENT ORIENTED

This serves as an instrument in managers’ hands to deal
MANAGERIAL effectively with business-related problems and uncertainties.
This also allows for setting priorities, formulating policies, and
ECONOMICS taking successful decision-making.

PRAGMATIC
The solution to day-to-day business challenges is realistic and
rational.
 THE CONCEPTS AND
IMPORTANCE OF
MANAGERIAL ECONOMICS
AGUINALDO, NICHOLAS ERLICH J.
 1. LIBERAL CONCEPTS OF
MANAGERIALISM MANAGERIAL
A market is a democratic space
ECONOMICS
where people make their choices
and decisions in a liberal way. The
organization and the managers
must function according to the
demand of the customers and
market trends; otherwise, this can
lead to business failures.
 2. NORMATIVE CONCEPTS OF
MANAGERIALISM MANAGERIAL
The managerial economics ECONOMICS
normative view states that
administrative decisions are
based on experiences and
practices of real life. They have a
systematic method for the study of
demand, forecasting, cost control,
product design and promotion,
recruitment, etc.
 3. RADICAL CONCEPTS OF
MANAGERSHIP MANAGERIAL
Managers have to have a creative ECONOMICS
approach to business concerns,
i.e. they have to make decisions
to improve the current situation or
circumstance. We concentrate
more on the need and satisfaction
of the consumer rather than just
the maximization of income.
IMPORTANCE OF MANAGERIAL ECONOMICS

BUSINESS PLANNING AND ANALYZE COST AND

FORECASTING PRODUCTION LEVEL
Managerial economics plays an Managerial economics focuses on
efficient role in formulating business minimizing the cost of business. It
policies by forecasting future determines the cost associated with different
demands and uncertainties. It business processes and finds out the cost-
assists in the effective decision minimizing level of output. Managerial
making of an organization by economics enables business managers in
supplying all information using ensuring that there is no resource wastage
economic tools and techniques. which reduces the overall cost.
IMPORTANCE OF MANAGERIAL ECONOMICS

FORMULATE MANAGES
PRICING POLICIES PROFIT
It helps in determining the right pricing Managerial economics monitor and control
policies for organizations. Pricing method the profitability of the business organization.
affects the profitability and revenue of the Profit is the ultimate goal of every business
business organization and therefore fixing and determines its success or growth. It
the right price is essential. Managerial ensures that the desired profit is earned by
economics analyses the market pricing making an estimate of the revenue and
structure and strategies for deciding the expenses of an organization at different
firm prices. levels of outputs.
IMPORTANCE OF MANAGERIAL ECONOMICS
CAPITAL
MANAGEMENT

Capital management is one of the important

functions played by managerial economics. It
manages and analyses all capital expenditures of
business which involves huge expenditures.
Before investing any amount anywhere it
measures the profitability of such a source for
allocating funds.
 PRINCIPLES OF
MANAGERIAL ECONOMICS
NOBLEJAS, ANDRE NICOLO L.
 PRINCIPLES OF
HOW
PEOPLE DECIDE

1. HUMANS FACE TRADEOFFS

To make decisions, people have to make choices on whether to
choose from the different options available.
 PRINCIPLES OF
HOW
PEOPLE DECIDE

2. PRICE OF OPPORTUNITY
Each decision involves a cost of opportunity which is the cost of
those options that we let go of while choosing the most appropriate
one.
 PRINCIPLES OF
HOW
PEOPLE DECIDE

3. FEEL FAIR ABOUT THE MARGIN

People typically think about the margin or income they receive before
investing in a specific project or individual with their money or
resources.
 PRINCIPLES OF
HOW
PEOPLE DECIDE

4. PEOPLE RESPOND TO STIMULUS

Decisions to be made highly depend on incentives related to a
product, service or activity. Negative incentives discourage people,
whilst positive incentives encourage people.
 PRINCPLES OF HOW
PEOPLE INTERACT
TRADE COULD BETTER ANYONE
The theory states that trade is a way for people to share.
Everyone gets an opportunity to offer those good products
or services they make. And buy those products or services
that other people are good at manufacturing.
Markets usually represent a good way to organize economic
activity
Markets often serve as a means of customer and product
interaction. Consumers express their desires and
expectations (demands) while producers determine whether
or not to manufacture necessary products or services.
 PRINCPLES OF HOW
PEOPLE INTERACT
TRADE COULD BETTER ANYONE
Governments may often boost the performance of the
market
During the time of adverse market conditions, or for the
benefit of society, the government intervenes in
business operations. Another such example is when the
government agrees on minimum wages for the benefit of
workers.
 PRINCIPLES ON HOW
ECONOMY WORKS
The standard of living of a country depends on its
capacity to generate goods and services

The companies must be productive enough to produce

products and services for the development of a country’s
economy. Ultimately it meets the demand of the customer and
enhances GDP to increase the standard of living in the country.

Prices increase when the government’s printing lots of

money.
 PRINCIPLES ON HOW
ECONOMY WORKS
If surplus money is available with citizens, their capacity to
spend increases, eventually leading to a rise in demand.
Inflation takes place when the manufacturers are unable
to satisfy market demand.

Society faces a short-term correlation between unemployment and

inflation

The government introduces numerous economic policies to reduce unemployment. Such

policies target in the short term, to improve the economy and what kind of practice contributes
to inflation.
SCOPE OF MANAGERIAL
ECONOMICS
VISERA, CHRIS BELLE A.
 Demand Theory

Demand Theory emphasizes

the behavior of the consumer
towards a product or service.
This takes into account the
customers’ desires,
expectations, preferences, and
Decisions on conditions to enhance the
manufacturing process.
Production and
Production Theory
This theory is primarily
concerned with the volume
of production, process,
capital and labor, costs
involved, etc. It aims to
MICRO-ECONOMY APPLIED
optimize production to meet
customer demand.
TO OPERATIONAL MATTERS
 Market Structure
Pricing Theory and
Analysis
It focuses on assessing a
product’s price taking into
account the competition, market
dynamics, production costs,
Exam and optimizing sales volume, etc.
Management
of Profit

the companies are

operating for assets hence
they always aim to
maximize profit. It also
depends on demand from
MICRO-ECONOMY APPLIED
the market, input costs,
level of competition, etc.
TO OPERATIONAL MATTERS
 Decisions on
Capital
and Investment
Theory

Capital is the most important

business element. This
MICRO-ECONOMY APPLIED philosophy takes priority over
the proper distribution of the
TO OPERATIONAL MATTERS resources of the company and
investments in productive
programs or initiatives to boost
operational performance.
economics

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Economic environment
A country’s economic conditions, GDP, government policies, etc. have MACRO-
an indirect effect on the company and its operations. ECONOMICS
APPLIED TO
BUSINESS
Social environment ENVIRONMENT
The society in which the organization, like employment conditions,
trade unions, consumer cooperatives, etc., functions also affects it.
economics

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Political environment
MACRO-
A country’s political system, whether authoritarian or democratic;
political stability; and attitude towards the private sector, impact the
ECONOMICS
growth and development of the organization APPLIED TO
BUSINESS
Management economics is an important method for assessing the
company’s priorities and objectives, the organization’s current role, ENVIRONMENT
and what the management can do to fill the void between the two.
THANK YOU
FOR
LISTENING
Managerial economics – it’s meaning, definition nature and
REFERENCES
types. (2021, February 2). Retrieved from
https://www.cheggindia.com/career-guidance/managerial-
economics-principals-types-and-scope/

Managerial economics: importance, significance, nature,

scope, and role. (n.d.). Retrieved from
https://commercemates.com/role-and-importance-of-
managerial-economics/
Nature, scope, and significance of managerial
economics. (n.d.). Retrieved from
https://theintactone.com/2019/10/13/me-u1-
topic-1-nature-scope-and-significance-of-
managerial-economics/
MANAGERIAL ECONOMICS AUGUST 27, 2021

THE THEORY OF THE

FIRMS
 Group 2
• Almeniana, Ariane Joyce E.
• Dela Cruz, Ma. Kharen B.
• Guillermo, Mica Moreen B.
• Ong, Jobelle C.
 01 • Introduction

• The Four Types

TABLE OF • How Does the Theory of Firm

work?

CONTENTS • Expansion on the Theory of the

Firm

• The Risk of Theory of the Firm

INTRODUCTION
Firm
A n “o rg a n i z at i o n t h at t ra n s l at e s i n p u t s t h at i t
p u rc h a s e s f r o m t h e m a r ke t i n t o o u t p u t s t h at i t
s e l l s i n t o t h e m a r ke t .”

A n y f i r m o f a n y s i ze i s i n e x i s t e n c e b e c a u s e :
• It identifies a consumer need and
d e ve l o p s / i n v e n t s a r e c i p e o n h o w t o s at i s f y t h at
need.

• I t m a ke s t h e r i g h t d e c i s i o n s w i t h r e s p e c t t o
m a k i n g o r b u y i n g i n p u t s s o t h at i t d e l i ve rs i t s
re c i p e at t h e l o w e s t p o s s i b l e c o s t .
Firm

• I t p r o v i d e s t h e b e s t i n c e n t i v e s t o i t s s t a ke h o l d e rs
and because.

• I t c o n s t a n t l y a n d d e l i b e rat e l y e v o l v e s t h ro u g h
t h e re l e n t l e s s p u rs u i t o f c o m p e t i t i ve ,
o rg a n i z at i o n a l , a n d s t rat e g i c a d v a n t a g e .
 The theory of the firm attempts to

1961
explain why firms exist, why they
operate and produce as they do, and
how they are structured. The theory
of the firm asserts that firms exist to
maximize profits; however, this
theory changes as the economic
marketplace changes.

What is the Theory

of Firm?
 FOUR TYPES OF
THEORY OF FIRMS
 In neoclassical economics,
the theory of the firm is a
microeconomic concept that
states that a firm exists and
make decisions to maximize
profits.

NEOCLASSICAL
THEORY
The basic assumptions
of the neoclassical
theory of the firm may
be outlined as follows:
1. The entrepreneur is also the
owner of the firm.

2. The firm has a single goal, that

of profit maximization.

3. This goal is attained by

application of the marginalist
principle
MC = MR
The basic assumptions
of the neoclassical
theory of the firm may
be outlined as follows:
4. The world is one of certainty.

5. Entry assumptions vary according to

the particular model (for example, in
monopoly entry is blockaded ex
hypothesis).

6. The firm acts with a certain time -

horizon which depends on various
factors.
Transaction Cost
Theory
• Part of corporate governance and agency
theory. It is based on the principle that
costs will arise when you get someone else
to do something for you.

• A transaction cost is any cost involved in

making an economic transaction

• In economics, the theory of transaction

costs is based on the assumption that
people are influenced by competitive self -
interest.
 Transaction
cost could
involve
Paying a margin to an
intermediary.

Search costs. When purchasing

foreign exchange, you will look
around for the dealer with the best
commission rate.

Contract costs
 TYPES OF COST

BARGAINING AND
DECISION

POLICING
SEARCH AND
AND
INFORMATION
ENFORCEMENT
Search and Information
These are the costs associated with looking for relevant
1968-1972
information and meeting with agents with whom the
transaction n will take place.

Bargaining and Decision

These are the costs related to coming to an agreement that
is agreeable to the parties involved in drawing up a contract.

Policing and Enforcement

These are the costs associated with making sure that the
parties in the contract keep their word and do not default on
the terms of the contract.
 Concerned with the relationship
that arises when one party (principal)
engages the services of another party
(agent) in order to achieve certain of
the principal’s goals, delegating to the
agent some decision-making
authority (or residual control rights).

PRINCIPAL-AGENT
THEORY
Agency relationships are
ubiquitous, it arises in the
following:
·Contractual engagement
·Direct employment

·Co-operative efforts

·All organizational activities.

Agency theory has
accordingly proved
applicable to a wide range
of issues, including:
• Insurance contracts
• Taxation
• Management accounting
• Procurement
• Transfer pricing
• Sales-force compensation
• Remuneration policies.
Best-known applications
·Issues of corporate governance.

·Issues of capital and debt structure.

·The market for corporate control.

·Issues of executive pay, within a

contractual theory of the firm.

·Laissez-faire economic system.

Principal -Agent Theory Assumptions

• Individual humans are boundedly rational,

fully competent, self-interested, self-serving
and opportunistic economic utility maximizes.

• The principal and agent have differing

degrees of risk aversion with respect to any
particular set of outcomes.
Principal -Agent Theory Assumptions

• Information is asymmetric between principal

and agent.

• Information on the agent's behavior is a

purchasable commodity.
Principal -Agent Theory Assumptions

• The objectives of the principal can be fully

specified, or at least the degree to which the
objectives of the principal can be specified is
independent of the form of contract adopted.

• There is an efficient market for principals and

agents.
Costs of Principal - Agent Theory

• Self-seeking cost (S)

• Monitoring cost (M)
• Risk-transfer cost (R)
 Evolutionary
Theory
A theory proposing that
economic processes
evolve and that
economic behavior is
determined both by
individuals and society as
 1961
Actions of the
company

History

Exampes of
Evolutionary Theory
 Theory influences decisions for
allocating resources, methods of
production, adjustments in prices, and
manufacturing in huge quantum. In
economic terms, utility refers to the
estimated value a customer uses for
measuring the level of happiness or
satisfaction derived from the
consumption of a specific product or
service.

HOW DOES THE THEORY OF

FIRM WORKS?
Expansion of the
Theory of the Firm

• What do organizations do?

• Why are they in a specific

business?

• What is the motivation for

their decisions regarding
capital and labor force
allocation?
Expansion of the
Theory of the Firm
Contemporary approach:
• Short-run motivation – involves
objectives like profit maximization

• Long-run motivation – involves

growth and sustenance of a firm;
sustainability
 Long-Term Sustainable

1961 Goals

Product Quality

Employee Training

Risks with Theory of

Firm's Profit Maximation
Goal
 REFERENCES
Economics Discussion. (n.d.). The Neoclassical Theory of the
Firm (6 Basic Assumptions). Economics Discussion.
https://www.economicsdiscussion.net/firm/the-neoclassical-
theory-of-the-firm-6-basic-
assumptions/5494?fbclid=IwAR0iTxagP-
81Ylv3mbMyUbFWydy9aXFDWij1xvt8hVTW-WXNMp5oX9Gy1pE

Gordon, J. (2021, July 1). Theory of the Firm (Economics) -

Explained. The Business Professor.
https://thebusinessprofessor.com/en_US/economic-analysis-
monetary-policy/theory-of-the-firm-definition

Kenton, W. (2020, October 23). Firm. Investopedia.

https://www.investopedia.com/terms/f/firm.asp
 REFERENCES
Liberto, D. (2021, May 19). Evolutionary Economics.
Investopedia.
https://www.investopedia.com/terms/e/evolutionary-
economics.asp

Pribanic, E. (2020, January 6). 3 Limitations of Profit

Maximization in Financial Management. Tech Funnel.
https://www.techfunnel.com/fintech/3-limitations-of-profit-
maximization-in-financial-management/
THANK
YOU!
FO R L I S T E N I N G A N D S P E N D I N G YO U R DAY W I T H U S

MANAGERIAL ECONOMICS AUGUST 27, 2021

Managerial Economics
 Economy. . .
. . . The word economy comes from a Greek word
Oikonomos which means “one who manages a
household.”

Economics is the study of how society manages its

scarce resources.
Microeconomics and Macroeconomics

• Microeconomics focuses on the individual parts of the economy.

– How households and firms make decisions and how they interact in
specific markets
• Macroeconomics looks at the economy as a whole.
– Economy-wide phenomena, including inflation, unemployment, and
economic growth
 The Diverse Fields of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Microeconomics Production/Output Price of Individual Distribution of Employment by
in Individual Goods and Services Income and Wealth Individual
Industries and Businesses &
Businesses Price of medical Wages in the auto Industries
care industry Jobs in the steel
How much steel Price of gasoline Minimum wages industry
How many offices Food prices Executive salaries Number of
How many cars Apartment rents Poverty employees in a firm

Macroeconomics National Aggregate Price National Income Employment and

Production/Output Level Total wages and Unemployment in
salaries the Economy
Total Industrial Consumer prices
Output Producer Prices Total corporate Total number of
Gross Domestic Rate of Inflation profits jobs
Product Unemployment
Growth of Output rate
POSITIVE• VERSUS NORMATIVE
Positive statements ANALYSIS
are statements that attempt to describe
the world as it is. Positive economics studies economic
behavior without making judgments. It describes what exists
and how it works.
– Called descriptive analysis
• Normative statements are statements about how the world
should be. Normative economics, also called policy
economics, analyzes outcomes of economic behavior,
evaluates them as good or bad, and may prescribe courses of
action.

– Called prescriptive analysis

 POSITIVE VERSUS NORMATIVE ANALYSIS
• Positive or Normative Statements?
– An increase in the minimum wage will cause a decrease in
?
employment among the least-skilled.
POSITIVE

?
– Higher federal budget deficits will cause interest rates to increase.
POSITIVE

?
 Fundamental Economic Problem
• There are three fundamental economic problems for every human
society. It is immaterial whether it is centrally planned, mixed or
advanced industrial society.

• They are what commodities are produced, how these goods are
made and for whom they are produced.

• What: Whether produce one good more and other less.

• How: how goods are produced; choice of technologies; division of

labor who will do what.

• For whom: for whom are goods produced? Distribution of products

among household; what pattern it takes; where the income goes.
 Economic System
• Market, Command and Mixed System
– We have indicated three fundamental problems in the previous
section. One can solve those problems in different way. It is a
question of organization that what, how and for whom can be
dealt with. The three available systems try to address those
problems under their respective market system.
– A market economy is one in which individuals private firms
market the major decisions about production and consumption.
A system of prices, market, of profits and losses, of incentives
and rewards determines what, how and for whom. In extreme
case the economy is seen practicing laissez-faire which means
non-interference from the government side in economic
decision making.
 Economic System
• In a command economy the extreme opposite happens
where the government takes all decision about the
economy.
• Mixed economy consists of the elements of command
and market. Most prevalent one.
• Society can not have everything. In must decide
through Input-Output relationship. It must choose the
technology. Inputs: land, labor, capital, and
entrepreneurship. Out is the commodity produced by
these inputs.
 Lionel Robbins
Economics is the science which studies human behavior
as a relationship between ends and scarce means which
have alternative uses.
 What is Economics?
• Let us have some idea of some economists and the
main idea of economics.
 INTRODUCTION OF MANAGERIAL ECONOMICS
Concept of Managerial Economics (contd.)
Managerial economics is by nature goal oriented and prescriptive which
may be viewed as economics applied in decision making at the level of firm.
Like an individual most of the problems of the firm emerge in allocation of
scarce resources.
We can trace different ideas given by scholars in this subject.
“Managerial economics is the price theory in service of business executive.”
-D.J. Watson
“Managerial economics can be viewed as an application of that part of
microeconomics that focuses on such topics as risk, demand, production,
cost, pricing, and market structure.” -Petersen and Lewis

“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.” - Edwin Mansfield
76
 What is Managerial Economics
 Douglas - “Managerial economics is .. the application of economic principles and
methodologies to the decision-making process within the firm or organization.”
 Pappas & Hirschey - “Managerial economics applies economic theory and methods
to business and administrative decision-making.”
 Salvatore - “Managerial economics refers to the application of economic theory
and the tools of analysis of decision science to examine how an organisation can
achieve its objectives most effectively.”
 INTRODUCTION OF MANAGERIAL ECONOMICS
Concept of Managerial Economics (contd.)
Following diagram shows how does the managerial economics provide the
link between traditional economics and decision sciences

Management
Problems

Economic Theory Decision Sciences

Managerial
Economics

Economic Methodology: Study of Functional Areas:

Descriptive Model Accounting, Finance, and
Prescriptive Model Marketing

Optimal
Decision
78
 Managerial Decision Problems

Economic theory Decision Sciences

Microeconomics Mathematical Economics
Macroeconomics Econometrics

MANAGERIAL ECONOMICS
Application of economic theory
and decision science tools to solve
managerial decision problems

OPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS
 What is Managerial Economics (contd.)
• Howard Davies and Pun-Lee Lam -
• “It is the application of economic analysis to business problems; it has
its origin in theoretical microeconomics.”

From these ideas it can be concluded managerial economics is the discipline,

which deals with the application of economic theory to business
management. Thus it lies on the borderline between economics and
business management and serves as a bridge between these two disciplines.
 INTRODUCTION OF MANAGERIAL ECONOMICS
Distinction between Managerial Economics and
Traditional Economics
There are some differences between managerial economics and traditional
economic theory because managerial economics seeks the help of other
disciplines such as statistics, mathematics, accounting, management to get
optimal solution to the managerial decision-making problems.
Differences between managerial economics and traditional economics which are
outlined below:

i. Managerial economics concerns with the application of economic

principles to the problems of the firm but the traditional economics deals
with the body of principles itself.

ii. Managerial economics is highly microeconomics in character. It studies the

problems of a firm but does not study the macroeconomic phenomenon.
But traditional economics consist of both micro and macro economics.
81
 INTRODUCTION OF MANAGERIAL ECONOMICS
Distinction between Managerial Economics and Traditional
Economics (contd.)

iii. Traditional economics is a study of both firm and an individual, whereas

managerial economics is a study of the problem of a firm only.
iv. Managerial economics focuses its attention in the study of profits
because it has great influence primarily on entrepreneurial decision and
value theory of the firm. In traditional economics, the microeconomics is
a branch under which all the theories of factor pricing such as rent,
wages, interest and profit are studied.

v. Traditional economics studies human behavior on the basis of certain

assumptions, but these assumptions may not be true in managerial
economics because managerial economics is concerned with practical
problems.

82
 What is Managerial Economics (contd.)
 It is an application of that part of microeconomics that focuses on
 Risk
 Demand
 Production
 Cost
 Pricing, and
 Market Structure.
 It helps rational decision making through MODEL BUILDING
 INTRODUCTION OF MANAGERIAL ECONOMICS
Scope of Managerial Economics (contd.)
Microeconomics Applied to Operational Issues:
Operational issues of firms are of internal nature. Internal issues include all
those problems which arise within the business organization and fall within
the control of the management. Some of the basic internal issues are:

a) Choice of business and the nature of products, that is, what to produce,
b) Choice of size of the firm, that is, how much to produce,
c) Choice of technology, that is, choosing the factor-combination
(technique of production)
d) Choice of price, that is, how to price the commodity,
e) How to promote sales,
f) How to face competition,
g) How to decide on new investments,
h) How to manage profit and capital,
i) How to manage an inventory, that is, stock of both finished goods and
raw materials. 84
 INTRODUCTION OF MANAGERIAL ECONOMICS
Scope of Managerial Economics (contd.)
Microeconomics Applied to Operational Issues:
Microeconomics deals with such questions confronted by managers. The
following microeconomic theories deal with most of these questions.
a) Demand Analysis and Forecasting: - An understanding of the forces
behind demand is a powerful tool for managers. Such knowledge
provides the background needed to make pricing decisions, forecast
sales and formulate marketing strategies. A forecast of future sales is
essential before employing resources.
b) Theory of Production and Production Decisions: - Production theory
explains the relationship between inputs and output. It also explains
under what conditions costs increase or decrease; how total output
behaves when use of inputs is changed; and how can output be
maximized from a given quantity of resources. Thus, it helps the
managers in determining the size of the firm, and the amount of capital
and labour to be employed keeping in view the objectives of the firm. 85
 INTRODUCTION OF MANAGERIAL ECONOMICS
Scope of Managerial Economics (contd.)
Microeconomics Applied to Operational Issues:

c) Market Structure and Pricing Theory: - Price theory explains how prices
of outputs and inputs are determined under different market
conditions; when price discrimination is desirable, feasible and
profitable; and to what extent advertising can be helpful in expanding
sales in a competitive market. Hence, price theory can be helpful in
determining the price policy of the firm.

d) Analysis of Cost: - Estimates of cost are essential for planning purposes.

The factors determining costs are not always known or controllable
which gives rise to cost uncertainty. Factors of production are scarce
and they have alternative uses. Factors of production may be allocated
in a particular way to get maximum output. Thus the analysis of costs
and their links to output are also importance in managerial economics.

86
 INTRODUCTION OF MANAGERIAL ECONOMICS
Scope of Managerial Economics (contd.)
Microeconomics Applied to Operational Issues:

e) Profit and Capital Management (Investment Decisions): - Profit

provides the index of success of a business firm. Profit analysis is
difficult, because the uncertainty of expectations makes realization of
profit planning and measurement difficult and these areas are covered
in the study of managerial economics.
Capital management means planning and control of capital
expenditures. Hence, it is very important for a firm to manage required
capital through proper investment planning. The main topics covered
are: cost of capital, types of investment decisions, and evaluation and
selections of investment projects.

87
 INTRODUCTION OF MANAGERIAL ECONOMICS
Scope of Managerial Economics (contd.)
Microeconomics Applied to Operational Issues:

f) Inventory Management: - Inventory refers to a stock of raw materials

or finished goods which a firm keeps. Management of inventory is very
important for a firm to keep intact of its current production and supply
capacity and to meet the challenges arising from change in market and
other conditions. In this regard, a major question that arises is: how
much of the inventory is the ideal stock? If it is high, capital is
unproductively tied up, and that might be useful for other productive
purposes if the stock of inventory is reduced. On the other hand, if the
level of inventory is low, production will be hampered. Hence,
managerial economics uses different methods which are helpful in
minimizing the inventory cost.

88
Stories of Four Great Economists
Adam Smith (1723 – 1790) was a
Scottish Economist.
He is said FATHER OF ECONOMICS
He is also FATHER OF CAPITALISM
His Book: WEALTH OF NATIONS
We want to talk about POVERTY not
wealth.
His main theory is “There is an
invisible hand that determine
everything – Don’t disturb it”
What is the invisible hand?
• P Invisible hands – demand
and supply – determines
quantity and price

S D

Q
 Economics is very easy
• Teach a Parrot to say Demand and Supply – then the parrot
becomes an economist.
• Ask her any questions – she will say ‘demand and supply’ –
then she is a great economist.
David Ricardo
• David Ricardo 1772-1823
• His theory said, increase in
agricultural production
would ultimately decline.
Thomas Malthus
• Thomas Robert Malthus,
(1766-1834), English
economist and
demographer.
 Malthus
• He was a Church Priest.
• Once he noted he had never seen a dead bird.
(except bats and crows).
• He searched the reasons.
• Bird die on a flowing stream and the body is
taken away by the water.
• Birds commit suicide when food is not available.
– A tragic case – God cannot do this.
• He investigated further and studied economics –
especially Ricardo
Population Theory
His theory: population
growth will always tend
to outrun the food
supply,
* There will be hunger,
famine, war, disasters,
* Population Control is
needed.
* This is called
Malthusianism
Karl Marx

Karl Heinrich Marx (1818 – 1883) was a

German philosopher, economist,
sociologist, historian, journalist and
revolutionary socialist. His ideas played a
significant role in establishing
communism. He published various books.
Das Kapital (1867–1894);

His thinking,
Factors of Production
Congealed Labor theory
Exploitation
Dialectic Materialism
John m Keynes
 1883 – 21 April 1946 – A British
Economist.
 Studied Mathematics
 Very young professor, most learned
young man,
 Wanted to marry an illiterate
women,
 Then what happened??
-- Wrote a book “General Theory”
Could not sell.
 Lord Keynes (continued)
• Went to stock market,
• Dominated stock market,
• Became rich,
• Became Lord,
• Married,
• Divided economics into Macro and Micro,
• An interview of his wife.
• He successfully introduced mathematics in economics
 The Process of Model-building
• The economics ‘method’
• The steps: the hypothetical-deductive approach
– make assumptions about behaviour
– work out the consequences of those assumptions
– make predictions
– test the predictions against the evidence
– PREDICTIONS SUPPORTED? The model is accepted as a good
explanation (for the moment)
– PREDICTIONS REFUTED? Go back and re-work the whole process
 Definitions
&
assumptions
If predictions
Theoretical not supported by
analysis data, model is
amended or
discarded
Predictions
If predictions
borne out by
Predictions data, the model
tested is valid, for
against data the moment
100
 Economic Laws
• Check the Idea
Idea • Prove it. If proved then

• Prove the Hypothesis

Hypothesis • If Proved then

• Prove the theory

Theory • If proved then

• Law is valid every where,

Law
 Economic Policy
Criteria for judging economic outcomes:
• Efficiency, or allocative efficiency. An efficient
economy is one that produces what people want at the
least possible cost.
• Equity, or fairness of economic outcomes.
• Growth, or an increase in the total output of an
economy.
• Stability, or the condition in which output is steady or
growing, with low inflation and full employment of
resources.
 Figure 1 The Circular Flow

MARKETS
Revenue FOR Spending
GOODS AND SERVICES
Goods •Firms sell Goods and
and services •Households buy services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labor, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of Taka

Copyright © 2004 South-Western

 Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
Good and SERVICES
Good and
services sold services
bought

FIRMS HOUSEHOLDS

Inputs for Land, labor

and capital
Production MARKETS FOR
FACTORS OF
PRODUCTION
Wages, rent, Income (=GDP)
interest and
profit (=GDP)
Flow of goods & services
Flow of money: Taka

THE CIRCULAR FLOW DIAGRAM

 Assumptions

Assumption: The economy composed of

households and firms only

Households: own factors of production,

consume goods and service

Firms: hire factors of production to

produce goods and services
 The Circular Flow of Economic Activity
 The diagram above represents the transactions between firms and
households in a simple economy.
 In the upper loop, the arrow emanating from firms to households
represents the sale by firms of goods and services to households. On
the other hand, the arrow from households to firms represents the
payments.
 In the lower loop, the arrow originating from the households to the
firms shows that firms hire labor and capital from households in order to
produce goods and services. The arrow emanating from the firms
indicates their payments for the use of the factors of production.
 The Circular Flow of Economic Activity
Prices of outputs and inputs are determined in these
markets and guide the decisions of all market
participants,
 The firm, an entity, organizes factors of production to
produce goods and services,
The prices of product and factor of production guide
interaction between individual and firms.
 The Production Possibilities FrontierModel: The Production
Possibilities Frontier

The production possibilities frontier is a graph that shows the

combinations of output that the economy can possibly
produce given the available factors of production and
the available production technology.
 Figure 2 The Production Possibilities Frontier
Quantity of
Garments
Produced

3,000 D

C
2,200
2,000 A
Production
possibilities
frontier
1,000 B

0 300 600 700 1,000 Quantity of

Rice Produced
 Figure 3 The Production Possibilities Frontier
Quantity of
Garments
Produced

3,000 D

C
2,200
2,000 A
Production
possibilities
frontier
1,000 B

0 300 600 700 1,000 Quantity of

Rice Produced
 Theory of the Firm
• Expected Value Maximization
– Owner-managers maximize short-run profits.
– Primary goal is long-term expected value maximization.
• Constraints and the Theory of the Firm
– Resource constraints.
– Social constraints
• Limitations of the Theory of the Firm
– Alternative theory adds perspective.
– Competition forces efficiency.
– Hostile takeovers threaten inefficient managers.
 Value of the Firm

The present value of all expected future profits

 Profit Measurement
• Business Versus Economic Profit
– Business (accounting) profit reflects explicit costs and
revenues.
– Economic profit.
• Profit above a risk-adjusted normal return.
• Considers cash and noncash items.
• Variability of Business Profits
– Business profits vary widely.
 Why Do Profits Vary Among Firms?
• Disequilibrium Profit Theories
–Rapid growth in revenues.
–Rapid decline in costs.
• Compensatory Profit Theories
–Better, faster, or cheaper than the competition is
profitable.
 Role of Business in Society
• Why Firms Exist
– Business is useful in satisfying consumer wants.
– Business contributes to social welfare
• Social Responsibility of Business
– Serve customers.
– Provide employment opportunities.
– Obey laws and regulations.
How to Read and Understand Graphs
• Each point on the Cartesian
plane is a combination of
(X,Y) values.

• The relationship between X

and Y is causal. For a given
value of X, there is a
corresponding value of Y, or
X causes Y.
Reading Between the Lines
• A line is a continuous string
of points, or sets of (X,Y)
values on the Cartesian
plane.
• The relationship between X
and Y on this graph is
negative. An increase in the
value of X leads to a
decrease in the value of Y,
and vice versa.
Positive and Negative Relationships
An upward-sloping line
describes a positive relationship
between X and Y.

A downward-sloping line
describes a negative
relationship between X and Y.
 Different Slope Values
5 7
b= = 05
. b= − = − 0.7
10 10

0 10
b= =0 b= =
10 0
 Different Slope Values
5 7
b= = 05
. b= − = − 0.7
10 10

0 10
b= =0 b= =
10 0