Scope

1. Demand Analysis and Forecasting

 - A firm relies on converting inputs into outputs and generates revenue from them. A clear and accurate estimation of demand
ensures a continuous efficiency of the firm. Several external factors like price, income, affect the demand that need to be
analyzed. 

Upon analyzing these factors affecting the demand for a product, managers can decide on the production. After estimating the
current demands, managers move ahead to predict future demands for the product. This is referred to as demand forecasting. 
The ability to forecast demands allows the management to capitalize on the opportunities available and strengthen the market
position of the firm. During the process of demand analysis, the management also gets to know about the external factors
affecting it and hence work on them to nullify any negative effect. 

2. Cost and Production Analysis

- Cost Analysis is yet another function of Managerial economics. A company makes a profit in two ways: by increasing the
demand or by reducing the cost. The determinants of assessing costs, the connection between cost and yield, the gauge of cost
and benefit are indispensable to a firm.

Cost analysis is an important exercise for any company. A component of cost vulnerability always exists since all the elements
deciding expenses are not generally known or controllable. 

By taking the help of managerial economics, the management of a company identifies the factors causing a variation in costs.
The company then uses the cost estimates in their decision making like pricing a product. 

Production analysis is more of a physical exercise. It involves examining the factors of production, also known as inputs, and
obtaining the best combination so as to get the least cost combination. 

In case of price rise in the inputs, the management looks beyond and tries out the alternatives. The analysis helps them get
instant ideas in such uncertain situations. 

The topics covered during cost and production analysis are production function, least-cost combination of factor inputs, factor
productiveness, returns to scale, cost concepts and classification, cost-output relationship, and linear programming. 

3. Pricing Decisions, Policies, and Practices

- Among the 4Ps of marketing, Price finds an important place. For any firm, Pricing is a very important aspect of Managerial
Economics as a firm's revenue earnings largely depend on its pricing policy. However, it is a bit challenging as other players are
competing in the same price segment. 

When pricing a product is done, the costs of production are also taken into account. Managerial economics helps the
management to go through all the analyses and then price a product. In an oligopoly market condition, the knowledge of pricing
a product is essential. 

4. Capital Management
- Every asset a business owns is known as its capital. Capital management thus becomes an important practice. 

Planning and control of capital expenditures is a basic executive function. It involves the Equi-marginal principle. The prime
objective is to ensure the sustainable use of capital. This means that funds should be kept at a bay when the managerial returns
are less than in other uses. 

The main topics dealt with during capital management are Cost of Capital, Rate of Return, and Selection of Projects. 

5. Profit Management
- A business firm is an organization designed with an intention to make profits and profits reflect the success of a company. After
all the analyses, it all rolls down to profits. 

To maximize profits a firm needs to manage certain things like pricing, cost aspects, resource allocation, and long-run decisions.
This would mean that the firm should work from the very beginning, evaluate its investment decisions and frame the best capital
budgeting policies. Profit management is considered as a difficult area of managerial economics. 

FOUR PRINCIPLES
1. People face trade-offs
Everyone faces decisions that put one option above the other. Most decisions, especially economic ones, involve trading off one
thing for another.
In society, one of the main trade-offs we experience is between efficiency and equity. Efficiency refers to something we can get
the most out of, especially if the resource is scarce. Equity implies that all members of society benefit equally from a resource.
The theory is that people will make good decisions if they thoroughly understand both options.

2.Opportunity - is the value of the next-best alternative when a decision is made

3.Rational people think at the margin

In general, economists like to assume that people are rational thinkers. Still, they look at marginal changes to describe small
adjustments to the plan of action. Another way of looking at this is that people make decisions when they think at the margin, or
around the edge of a plan of action.

4. People respond to incentives

This economic principle isn’t surprising but makes a lot of sense when we consider the last few principles. Since consumers make
decisions by comparing benefits and cost, what happens when that scale changes? That’s where incentives play a part.

Incentives inspire consumers to act by offering up an extra reward to those people who will change their behavior. Incentives can
also be positive or negative, meaning you can incentivize people to do something or not to do something.

5.Opportunity cost principle is related and applied to scarce resource. When there are alternative uses of scarce resource, one
should know which best alternative is and which is not. We should know what gain by best alternative is and what loss by left
alternative is.

FUNDAMENTAL PRINCIPLES
1. The Incremental Concept:
The incremental concept is probably the most important concept in economics and is certainly the most frequently used in
Managerial Economics. Incremental concept is closely related to the marginal cost and marginal revenues of economic theory.

The two major concepts in this analysis are incremental cost and incremental revenue. Incremental cost denotes change in total
cost, whereas incremental revenue means change in total revenue resulting from a decision of the firm.

2.Concept of Time- The time perspective concept states that the decision maker must give due consideration both to the short
run and long run effects of his decisions. He must give due emphasis to the various time periods. It was Marshall who introduced
time element in economic theory. The economic concepts of the long run and the short run have become part of everyday
language. Managerial economists are also concerned with the short run and long run effects of decisions on revenues as well as
costs. The main problem in decision making is to establish the right balance between long run and short run.

3. Rational people think at the margin

-In general, economists like to assume that people are rational thinkers. Still, they look at marginal changes to describe
small adjustments to the plan of action. Another way of looking at this is that people make decisions when they think at
the margin, or around the edge of a plan of action.

4. Equi-Marginal Concept:
-One of the widest known principles of economics is the equi-marginal principle. The principle states that an input should be
allocated so that value added by the last unit is the same in all cases. This generalisation is popularly called the equi-marginal.

Let us assume a case in which the firm has 100 unit of labour at its disposal. And the firm is involved in five activities viz., А, В, C,
D and E. The firm can increase any one of these activities by employing more labour but only at the cost i.e., sacrifice of other
activities.

5. Discounting Concept:

This concept is an extension of the concept of time perspective. Since future is unknown and incalculable, there is lot of risk and
uncertainty in future. Everyone knows that a rupee today is worth more than a rupee will be two years from now. This appears
similar to the saying that “a bird in hand is more worth than two in the bush.” This judgment is made not on account of the
uncertainty surrounding the future or the risk of inflation.

6. Risk and Uncertainty:

Managerial decisions are actions of today which bear fruits in future which is unforeseen. Future is uncertain and involves risk.
The uncertainty is due to unpredictable changes in the business cycle, structure of the economy and government policies.
This means that the management must assume the risk of making decisions for their institution in uncertain and unknown
economic conditions in the future. Firms may be uncertain about production, market prices, strategies of rivals, etc. Under
uncertainty, the consequences of an action are not known immediately for certain.

Business Cycles- are a type of fluctuation found in the aggregate economic activity of the nation. A cycle that consist of
expansion occurring about the same time in many economic activities, followed by contraction/recession.

FOUR PHASES OF ECONOMICS

Expansion
During expansion, the economy experiences relatively rapid growth, interest rates tend to be low, and production increases. The
economic indicators associated with growth, such as employment and wages, corporate profits and output, aggregate demand,
and the supply of goods and services, tend to show sustained uptrends through the expansionary stage. The flow of money
through the economy remains healthy and the cost of money is cheap. However, the increase in the money supply may spur
inflation during the economic growth phase.

Peak
The peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may stabilize for a short period before
reversing to the downside. Peak growth typically creates some imbalances in the economy that need to be corrected. As a result,
businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak.

Contraction
A correction occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not
immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in
prices. If the contraction continues, the recessionary environment may spiral into a depression.

Trough
The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery.
The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating
spending and income. The low point provides an opportunity for individuals and businesses to reconfigure their finances in
anticipation of a recovery.

Nature of Managerial Economics

The following forms of nature show us how it affects people with regard to decision making.

Scientific
Managerial economics is scientific in approach because it handles real-life situations in a well-calculated manner. Just like
science, it goes through the essential processes of methodical observations, continuous experimentations, and application. In
this way, policies formulated that carefully go through these steps often render the final decision solid and really applicable.

As an Art
As an art, managerial economics combines proven knowledge and strategies by analyzing the theoretical ideas that form
decisions. This is deplored in a step by step way to achieve organizational objectives.

Administrative
In order to come up with ideas that help in decision making for the organization, managerial economics helps in making
decisions that are right for the business environment and fitting for administrative responsibilities.

Resource Control
It is often deplored when ensuring proper management of available resources. With several options to choose from the number
of resources provided such as information, human, capital and technological, for effective management, the manager looks at
the most fitting ones.

Prescriptive
The management of an organization deals in achieving a certain goal. So all the ideas formulated and steps taken determine the
level of success recorded.

Micro Economics: Managerial economics analyses and solves problems of a particular firm or organization only but not of the
whole economy. It focuses on individual units of the economy and provides optimum solutions for facing problems.

Macro Economics: Managerial economics properly studies macro or external environment within which business operates for
better management of the business. It analyses different external factors that affect the business organization like economy
state, government policies, market conditions, etc.
Multi-disciplinary
Managerial Economics uses different tools and principles from different disciplines like accounting, finance, statistics,
mathematics, production, operation research, human resource, marketing, etc. This helps in coming up with a perfect solution.

Management Oriented: It educates leaders and managers on how to make crucial decisions in critical situations.

Managerial Economics is dynamic in nature

Managerial Economics deals with human-beings (i.e. human resource, consumers, producers etc.). The nature and attitude
differs from person to person. Thus to cope up with dynamism and vitality managerial economics also changes itself over a
period of time.

Limitations of Managerial Economics

Unpredictable
Because economic activities are based on human behaviors, it is prone to errors. The combined process of producing,
distributing and consuming goods and the rendering of services is connected to human activities which could sometimes be
unpredictable.

Non-replicable
Most times predicting market behaviors is not easy. That’s why using the same method over and over again would not work as
there is no specific solution that could meet up with what earlier happened in the market.

No Unified Solution
In trying to address an economic situation in the country, different economic managers will be tasked with coming up with the
solutions. Even when they work together, they can hardly come up with the same conclusions. So their predictions about how
the market will react to the problems may not work as expected.

Open to Political Manipulation

Political economists are among many people given to criticism of the process of decision making. Using normative economics,
politicians often call for changes in policies which if closely looked at, are for their gain.

Inaccurate Conclusion
Most theories often put forward by economic experts to forecast future policies that sometimes contradict one another.

You might have a question about the difference between managerial economics and business economics, how managerial
economics differs from economics and the techniques of managerial economics.

While managerial economics deals with the theoretical application of management using statistics, business economics uses
quantitative methods to analyze the difference in organizational structures and the relationship of companies.

LIMITATION OF MANAGERIAL ECONOMICS

1.Unpredictable
Because economic activities are base on human behaviors, it is prone to errors. The combined process of producing, distributing
and consuming goods and the rendering of services is connected to human activities which could sometimes be unpredictable.

2.Non-replicable
Most times predicting market behaviors is not easy. That’s why using the same method over and over again would not works as
there is no specific solution that could meet up with what earlier happened in the market.

3.No Unified Solution

In trying to address an economic situation in the country, different economic managers will be tasked with coming up with the
solutions. Even when they work together, they can hardly come up with the same conclusions. So their predictions about how
the market will react to the problems may not work as expected.

4.Open to Political Manipulation

Political economists are among many people given to criticism of the process of decision making. Using normative economics,
politicians often call for changes in policies which if closely look at, are for their again.

5.Inaccurate Conclusion
Most theories often put forward by economic experts to forecast future policies that sometimes contradict one another.

COMMON PITFALLS/MISTAKES IN BUSINESS THAT CAN HAPPEN:

1.Not taking the time to plan
2.Forgetting to set goals for your start-up
3.Trying to do it all by yourself
4.Skipping the contracts
5.Overspending/Underspending
6. Forgetting about financing
7.Not marketing or Advertising
8.Undervaluing your product or service
9.Not protecting your Intellectual Property
10.Losing focus