Introduction to Managerial Economics:

Emergence of Managerial Economics as a separate course

of management studies can be attributed to at least three
factors.
1) Growing complexity of business decision making
process due to changing market conditions and business
environment.
2) Increasing use of economic logic, concepts, theories and
tools of economic analysis in the process of business
decision making.
3) Rapid increase in demand for professionally trained
managerial manpower.
The growing complexity of the business world can be
attributed to the growth of large scale industries,
growth of a large variety of industries, diversification of
industrial products, expansion and diversification of
business activities, growth of MNCs, mergers and
takeovers etc.

The growing complexity of business decision making has

inevitably increased the application of economic
concepts, theories and tools of economic analysis in
that area.
 Economics

Economics is a social science which studies

human behaviour in relation to optimizing
allocation of available resources to achieve
the given ends.
 Managerial Economics

It can be broadly defined as the study of

economic theories, logic and tools of economic
analysis that are used in the process of business
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.
Why do managers need to know
Economics?

Economics provides analytical tools and

techniques that managers need to achieve the
goals of the organizations they manage.
 Applications of Economics to Business
decisions:
Business decision making is essentially a process of selecting
the best out of alternative opportunities open to the firm.
The process of decision making comprises four main
phases.
1) Determining and defining the objective to be achieved.
2) Collections and analysis of business related data and other
information regarding economic, social, political and
technological environment and forecasting the necessity
and occasion for decisions.
3) inventing, developing and analyzing possible
courses of action.

4) Selecting a particular course of action from the

available alternatives.
The scope of Managerial Economics:
Economics two major branches a)
Microeconomics and b) Macroeconomics.
The areas of business issues to which economic
theories can be directly applied may be broadly
divided into two categories : a) microeconomics
applied to operational or internal issues. b)
macroeconomics applied to environmental or
external issues.
Operational issues are of internal nature. Internal
issues include all those problems which arise
within the business organization and falls within
the purview and control of the management.
Some of the basic internal issues are i) choice of
business and nature of the product, i.e., what to
produce; ii) choice of size of the firm .i.e., how
to produce; iii) choice of technology, i.e.,
choosing the factor-combination; iv) choice of
price, i.e., how to price the commodity; v) how
to promote sales vi) how to face price
competition
vii) How to decide on new investments viii) how
to manage profit and capital ix) how to manage
inventory, i.e., stock of both finished goods and
raw materials.
Microeconomics deals with such questions
confronted by managers of business enterprise.
The following microeconomic theories deal with
most of these questions.
1) Theory of Demand 2) Theory of production
and production decisions. 3) Analysis of market
structure and pricing theory.
The major macroeconomic issues that figure in
business decision making are as follows.
1.) Issues related to macroeconomic trends in the
economy.
2) Issues related to foreign trade.
3) Issues related to Government Policies.
Microeconomics is the study of individual
consumers and producers in specific markets.
– supply and demand
– pricing of output
– production processes
– cost structure
– distribution
Macroeconomics is the study of the aggregate
economy.
– national income analysis
– gross domestic product
– unemployment
– inflation
– fiscal policy
– monetary policy
Economics and Managerial decision making
Economics
Questions andmust
that managers Managerial
answer:
– What are Decision
the economic Making
conditions in a particular
market?
•Market Structure?
•Supply and Demand Conditions?
•Technology?
•Government Regulations?
•International Dimensions?
•Future Conditions?
•Macroeconomic Factors?
 Economics and Managerial
Decision Making
Questions that managers must answer:
– Should our firm be in this business?
– If so, what price and output levels achieve our
goals?
 Economics and Managerial
Decision Making
Questions that managers must answer:
– How can we maintain a competitive advantage
over our competitors?

•Cost-leader?
•Product Differentiation?
•Market Niche?
•Outsourcing, alliances, mergers,
acquisitions?
•International Dimensions?
 Review of Economic Terms
Scarcity is the condition in which resources are
not available to satisfy all the needs and wants of a
specified group of people.
 Review of Economic Terms

Because of scarcity, an allocation decision

must be made. The allocation decision of a
society is comprised of three separate choices:
Review of Economic Terms

– What and how many goods and services should

be produced?
Review of Economic Terms
– How should these goods and services be
produced?
Review of Economic Terms
– For whom should these goods and services be
produced?
 Review of Economic Terms
• For the firm, these allocation choices can be
restated as follows:
 Review of Economic Terms
– What : The product decision.
 Review of Economic Terms
• How : The hiring, staffing,
procurement, and capital budgeting
decisions.
 Review of Economic Terms
– For whom : The market
segmentation decision.
 Review of Economic Terms
• Resources
– Factors of production or inputs
– Land, labor, capital, entrepreneurship