Managerial Economics Expected Value Maximization means a firm aims to maximize

its long-term value, not just short-term profits. Here’s a

What is Economics breakdown:
Economics studies how people and societies produce,  Profit Maximization: Firms often focus on
distribute, and use goods and services. It looks at how maximizing immediate profits. This means they aim
resources are allocated to meet the needs and wants of to make the most money in the short run.
individuals and groups.
 Owner-Manager’s Role: The owner-manager might
Economics is about managing limited resources to satisfy work to boost short-term profits, but this is just a part
people's unlimited wants and needs. It involves making of the bigger picture.
choices on how to best use resources like time, money, and
materials because they are limited compared to the endless  Long-Term Focus: The primary goal is to maximize
desires people have. the firm’s long-term expected value. This means
making decisions that will increase the firm’s overall
The Circular Flow Diagram value over time, considering future profits, risks, and
The circular flow represents the continuous movement of investments.
money, resources, and products between households and Limitations of Theory of the Firm
businesses in an economy. Households earn income by
providing resources, and they spend this income on goods and Managers often aim for “good enough” rather than the
services produced by businesses, which in turn use the revenue absolute best. They might settle for a solution that works well
to pay for the resources. This creates a continuous loop or enough rather than spending extra time and resources to find
"circular flow" of economic activity. the perfect one.
Overview of Managerial Economics Attracting and Retaining Managers: Generous salaries and
stock options can help attract and keep talented managers who
Economic Terminology and Reasoning: Managers learn and can drive a firm’s success. These rewards make the job more
use economic terms and logical thinking like Supply and appealing and motivate managers to stay and perform well.
Demand, it is the understanding of how the quantity of a
product supplied by the company and the demand from Risky Ventures: Turning down a risky venture might be seen
customers affect pricing and sales. It is used by the as avoiding unnecessary risk. It’s not always inefficient;
organization to better understand business situations. This sometimes it’s a smart move to avoid potential losses. The
helps them analyze market conditions, costs, and other factors decision depends on the specific circumstances and potential
that influence their decisions. benefits versus risks.
Improvement of Managerial Decisions: By applying Purpose of Managerial Economics
economic principles, managers can make better choices about
resource allocation, pricing, production, and other aspects of 1. Efficient Business Process: It involves analyzing
running a business. This leads to more efficient operations and internal factors like operations and resource use to
improved performance of the organization. improve the business process and make better
decisions.
Evaluating Choices Alternatives 2. Framing Policies:managerial economics helps or
supports the process of developing policies. It
Economic forces affect organizations and managerial provides the tools and analysis needed to make
behavior: This means understanding how changes in the informed decisions and create strategies based on
economy (like inflation or market trends) impact a company data and past experiences.
and how the actions of managers influence the company’s
financial performance.
3. Long-Term Planning: Use economic theories and
Economic concepts and quantitative methods for decision- tools to analyze both internal and external factors
making: This involves using economic theories and numerical affecting your business. This helps in making
tools (like statistics) to help managers make better business informed decisions for future growth.
decisions. 4. Sourcing Raw Materials: Make smart decisions
about obtaining raw materials by considering factors
Theory of the Firm like supply scarcity, suppliers, competitors, and
customers.
Firms exist to produce and sell goods and services. They
5. Demand Analysis: This helps you understand what
organize resources like labor and materials to make products
products or services to offer by studying consumer
efficiently and distribute them to consumers. They make
behavior, purchase trends, and factors that influence
decisions to maximize profits by choosing the best production
buying decisions.
methods and managing costs.
6. Profit Analysis: Focuses on ensuring your business
Expected Value Maximization earns reasonable profits, which is essential for its
success and sustainability.
 7. Efficient Management of Funds: Budgeting and  Entire Economies and Industries: Analyzes large-
controlling money flow are key to keeping your scale economic issues like national income, inflation,
business running smoothly and avoiding financial and unemployment, rather than focusing on
issues. individual businesses or people.
8. Effective Market Research: Studying both local and
international markets helps identify niche Importance of Managerial Economics to Managers
opportunities and supports global expansion.
Key Terminology and Theoretical Foundation: Economics
(A "niche" refers to a specialized segment of the provides essential terms and theories that help managers
market with specific needs or preferences. For understand and analyze business concepts more effectively.
example, instead of targeting the general market, a
business might focus on a particular group, like eco- Techniques and Relationships: Learning various techniques
friendly products for environmentally conscious in areas like marketing, production, operations, and finance
consumers. Finding a niche helps businesses cater to helps managers see how these practices are connected to
a specific audience and stand out in a competitive economic principles, leading to better decision-making.
market.)
9. Measure Efficiency: Create reports with statistics to
track how well the business is performing and keep Scarcity and Decision-Making: Understanding that both
management informed. organizations and consumers face limited resources helps
managers make better decisions about resource allocation and
prioritize effectively.
10. Economic Intelligence: Stay updated on external
factors like government policies, job market trends,
product life cycles, exchange rates, and emerging Creating Customer Value: In a competitive market,
economies. This information helps you make managers use economic principles to create and enhance value
informed decisions and adapt to changes. for customers, helping their business stand out and succeed.

Microeconomics vs Macroeconomics - Sample of economic principles

Microeconomics - is the study of how individuals and Supply and Demand: Understanding how
businesses make decisions about using resources and setting changes in supply and demand affect prices
prices for goods and services. It looks at: and consumer preferences helps managers
set competitive prices and develop products
that meet market needs.
 Resource Allocation: How people and businesses
decide to use their resources.
 Price Determination: How supply and demand, along
with other factors, set prices in the market.

Microeconomics involves several key principles:

 Demand, Supply, and Equilibrium: Examines how

the quantity of goods demanded by consumers and
the quantity supplied by producers determine prices
and quantities in the market.
 Production Theory: Looks at how businesses decide
on the amount and combination of resources to
produce goods and services efficiently.
 Costs of Production: Analyzes the expenses
involved in producing goods and services, including
fixed and variable costs.
 Labor Economics: Studies how labor markets work,
including wages, employment, and the impact of
labor policies.

Macroeconomics

Macroeconomics looks at the big picture of an economy. It

focuses on:

 Country-Wide Behavior: How a country’s overall

economy functions and how policies affect it.