HANDOUT 1.

0 | Fundamentals of Managerial Economics MANAGERIAL ECONOMICS: MODULE 1

FUNDAMENTALS OF MANAGERIAL ECONOMICS

Learning Objectives:
1. Comprehensive understanding of the use of economic theory in making sound management decisions.
2. Understand the concept of managerial economics, its scope and nature, types and its limitations in relation to their
previous background on the basic concept of economics.

Course Content:
Module 1: Fundamentals of Managerial Economics
1. Nature and Scope of Managerial Economics
2. Economics of Effective Management and the Nature of the Firm
3. Measurement of profit, goals and cost

Introduction Definition of Managerial Economics

Moving to the higher discipline of managerial economics Managerial Economics is a discipline that deals with the
it is essential for the learners to revisit their basic application of economic theory to business management.
knowledge on the definition of the concept of economics. It deals with the use of economic concepts and principles
The science of economics begins with a simple of business decision making.
assumption: human wants are unlimited and insatiable,
but resources are limited. When you apply important aspects of economic
principles, theories, tools, and approaches to solve
If human wants are unlimited, then surely not enough practical problems in your business, you’ve applied
economic resources exist to fulfill those wants entirely, managerial economics. As Mark Hierschey describes in
which is why economic resources are often described as his book Managerial economics, it helps students on how
scarce resources. Since scarce resources can only to use common sense to understand business and solve
produce so much, people must decide about what they managerial problems.
want and how much they are willing to pay for it.
Types of Managerial Economics
Definition of Economics
Below are the different types of managerial economics
Economists describe goods and the products and that we can use for business.
services that people want and services as having utility,
meaning that they must provide some satisfaction. Hence, Normative Managerial Economics
the goal of all economic activity is to fulfill the wants of the
people. People, businesses, and governments all have This aspect of management is unique and takes into
wants. However, the wants of people, businesses, and consideration the idea that a practical solution to
governments are too many and resources are limited and managerial problems is provided. It places emphasis on
should be allocated. the fact that the decision making of an organization be
viewed from the point of true happenings, rather than be
Given this condition, we can define Economics as a based on theories alone.
social science concerned with the production, distribution,
and consumption of goods and services. It studies how Forecasting helps to see ahead of the nature of business
individuals, businesses, governments, and nations make operations and decisions, it’s easy to solve any problem
choices about how to allocate resources. that arises when a practical approach is used. With this in
mind, the organization would be able to cut costs when
problems are detected on time because they’d be quickly
attended to before they grow bigger and harder. When an

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Managerial Economics
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HANDOUT 1.0 | Fundamentals of Managerial Economics MANAGERIAL ECONOMICS: MODULE 1

organization recruits the best in a particular field, jobs will Principles of Managerial Economics
be done effectively. As a result, you’d not only produce
the best product, promoting it will be practical and result- Showing how the principles of managerial economics are
driven because there’s a standard approach to its deplored to solve real-life problems is the best way to
production. understand the relationship between management and
economics.
Liberal Managerial Economics
We’re going to look at the three core principles. Not only
In this context, your organization operates based on that, but we’ll also explain the sub-ideas and functions
market forces and trends. People, your customers, have under each of them.
the freedom to buy what they want and need in the market
at any given point in time. The three major principles we’ll look at are:
▪ The principles of decision making
They make their own choices and buying decisions by ▪ The principles of business communication
going for whatever they want. So it befits your ▪ The principles of economic functions
organization to study customer behavior through
adequate data analysis that helps you determine how you The Principles of Decision Making
respond to your customers’ needs. This is where your
organization’s management comes in. You put in place a This involves the way people go about their businesses
good plan to ensure customer satisfaction. and the different decision-making processes that help
them make informed decisions about certain products and
Radical Managerial Economics services.

In order to beat competitions by meeting customer • The Choices Made: In order to meet up with the
satisfaction, there is a need to ensure that a practical and standard set by an organization, you have to
goal-driven approach is enforced. This would mean the decide if doing business with them is favorable to
management going out of their way to plan and strategize both of you. In this way, there’ll be a series of
the best method of meeting set goals. And what this options to choose from. Then if people like they
means is that to achieve this, management would have can freely choose any aspect of the business that
put aside the need for profit maximization as they focus suits them.
on customer satisfaction. This makes sense as satisfying
the customers means generating leads. And this set of • Opportunity Cost: Opportunity costs represent
people will eventually become returning customers from the potential benefits that an individual, investor,
which your organization can continue to generate profit. or business misses out on when choosing one
alternative over another.
Note:
✓ Normative: The administration takes pragmatic
decisions pertaining to cost management, • The Gains: Before you can convince people to
demand analysis, production, and advertising. consider engaging in your business, you’d do
✓ Liberal: Consumer demand dictates markets; more than just putting the products right in front
customers are free to make their buying decisions of them. That may have some effect. But the real
and choices. benefit is in letting them see what’s really in it for
✓ Radical: The management adopts a game- them when they get involved.
changing attitude to prioritize customer needs,
requirements, and satisfaction—over business • Attraction Point: When people get positive
profits. incentives with an offer, they jump at it

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HANDOUT 1.0 | Fundamentals of Managerial Economics MANAGERIAL ECONOMICS: MODULE 1

The Principles of Business Communication

.
Communication is key to the success of every business. • The Principles of Economic Functions
This is why it’s an important principle that affects the
success or otherwise of any business. No doubt about it, the economic situation of a country
has an effect on the business activity of any
• Win-win Situation organization such as:

Participation in a business transaction gives mutual o Improved Living Standard: Business activities
benefits. As an exchange culture, both parties have which involve selling and buying and offering of
something to gain. When businesses and services often boost the economy of a country.
organizations create products and offer services, the When businesses meet consumer needs and
customer in turn needs those products or services.. there is a thriving atmosphere for trading
activities, the economy booms.
• Economic Relationship o Curbs Inflation: When there’s too much money in
circulation, inflation sets in. People’s purchasing
An atmosphere where relationships can be formed, capacity increases and the prices of goods would
and people can interact for mutual gains is essential increase astronomically.
for growth. A market is often where the producers and o Economic Stability Efforts: When there is inflation
consumers meet for a successful business in the country, the government intensifies effort to
transaction. roll out policies that would stabilize the economy.
This is key as an aspect of managerial
Here are the two common economic relationships for economics.
a business owner or policymaker to remember when
making decisions: Nature of Managerial Economics

Price Up, Demand Down The following forms of nature show us how it affects
people with regard to decision making.
When a business increases its prices, it will almost
always see sales for its product or service fall. This is ▪ Scientific Managerial. Economics is scientific in
because consumers prefer to pay less for something, approach because it handles real-life situations in
so fewer people will be able to afford the good— a well-calculated manner. Just like science, it
hence, “price up, demand down.” goes through the essential processes of
methodical observations, continuous
Price Up, Supply Up experimentations, and application.

When prices go up, consumers demand less. If the ▪ As an Art. As an art, managerial economics
product or service a business is supplying can combines proven knowledge and strategies by
command a higher price, it’s in the company’s best analyzing the theoretical ideas that form
interest to supply more of it to earn higher revenue. decisions. This is deplored in a step-by-step way
So, price up, supply up. Like demand, its incentives to achieve organizational objectives.
at work here, too.
▪ Administrative. In order to come up with ideas
• Government Intervention that help in decision making for the organization,
managerial economics helps in making decisions
Whenever there’s an unfavorable policy for that are right for the business environment and
businesses, the government often sets in by fitting for administrative responsibilities.
communicating with stakeholders to jointly work out Administration is relating to the arrangements
the best solution to the problem.

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HANDOUT 1.0 | Fundamentals of Managerial Economics MANAGERIAL ECONOMICS: MODULE 1

and work that is needed to control the operation Scope of Managerial Economics
of a plan.
The scope is as follows:
▪ Resource Control. It is often deplored when
ensuring proper management of available Analysis of Demand and Forecasting
resources. With several options to choose from
the number of resources provided such as This means that producers often minimize their
information, human, capital, and technological, production output based on market demand. With this, it
for effective management. becomes necessary for an organization to have a
production schedule before going ahead to roll out
▪ Micro-economic. It is a branch of economics that products. Demand analysis assists the organization in
studies the behaviour of individual consumers maintaining market share with its competition and this
and firms. would result in an increase in profit.

▪ Macroeconomic. It is a branch of economics that A production schedule is an organized plan that

studies how an overall economy—the markets, businesses use to streamline the process of introducing
businesses, consumers, and governments— their products to their consumer market. These schedules
behave. Macroeconomics examines economy- include steps like:
wide phenomena such as inflation, price levels,
rate of economic growth, national income, gross • Supply of raw materials
domestic product (GDP), and changes in • Labor
unemployment. • Logistics
• Costs
▪ Dynamic. In general, management is a dynamic • Production timeframe
affair. With differences in human preferences,
there is usually a constant change in decisions Analysis of Cost and Production
made.
One of the key functions of a manager is to look into the
▪ Multidisciplinary. It is the combination of several cost figures of output. He also finds out the costs of
ideas from different disciplines such as production and sees if it meets up with the total expected
mathematics, statistics, finance, human income. In ensuring that the necessary information is
resource, marketing, etc. that forms the decision- identified, he works on the most fitting pricing policy based
making process. on the cost of production.

▪ Prescriptive. The management of an organization Pricing Strategy

deals with achieving a certain goal. So all the
ideas formulated and steps taken to determine As a scope of managerial economics, the pricing
the level of success recorded. determines demand and how consumers react to
products. This comes after doing a thorough market
▪ Management-driven. What this means is that it is analysis.
largely a pragmatic approach. It makes use of
real-time situations. Below are some of the pricing strategies that businesses
may employ:

• Value-based pricing

With value-based pricing, you set your prices

according to what consumers think your product
is worth.
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and information. This would affect project selection, cost

• Competitive pricing of capital, and the Return on Investment.

When you use a competitive pricing strategy, Limitations of Managerial Economics

you're setting your prices based on what the
competition is charging. This can be a good Unpredictable
strategy in the right circumstances, such as a
business just starting out, but it doesn't leave a lot Because economic activities are based on human
of room for growth. behaviors, it is prone to errors. The combined process of
producing, distributing, and consuming goods and the
• Price skimming rendering of services is connected to human activities
which could sometimes be unpredictable.
If you set your prices as high as the market will
possibly tolerate and then lower them over time, Non-replicable
you'll be using the price skimming strategy. The
goal is to skim the top off the market and the lower Most times predicting market behaviors is not easy. That’s
prices to reach everyone else. With the right why using the same method over and over again would
product it can work, but you should be very not work as there is no specific solution that could meet
cautious using it. up with what earlier happened in the market.
• Laissez-faire is a theory of free-market capitalism
• Cost-plus pricing directly opposed to government intervention such
as regulation, subsidies, minimum wages, trade
This is one of the simplest pricing strategies. You restrictions and corporate taxes
just take the product production cost and add a • Monetarism is a macroeconomic theory that
certain percentage to it. While simple, it is less promotes the idea that governments can achieve
than ideal for anything but physical products. economic stability by controlling monetary
supply.
• Penetration pricing • Marxism is a social, political and economic
philosophy that examines the effect of capitalism
In highly competitive markets, it can be hard for on labor, productivity and economic
new companies to get a foothold. One way some development. Capitalism is an economic system
companies attempt to push new products is by in which the means of production and distribution
offering prices that are much lower than the are privately or corporately owned
competition.
No Unified Solution
Profit Management
In trying to address an economic situation in the country,
As the goal of your organization is to maximize profit, this different economic managers will be tasked with coming
is part of the scope of management in which the manager up with the solutions. Even when they work together, they
finds a balance between cost estimates and profit can hardly come up with the same conclusions.
generation. When a manager is able to reduce
uncertainty, the firm makes more profit. Open to Political Manipulation

Capital Investment Political economists are among many people given to

criticism of the process of decision making. Using
Managing capital is a very important function of normative economics, politicians often call for changes in
management that’s key to success. The investment could policies which if closely looked at, are for their gain.
come in different forms like equipment, technology, skills,
*End of module 1*

5 | ECO301B
Managerial Economics
Miranda, Arwyn Dela Cruz