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Unit 1

Managerial economics is the application of economic theory and methodology to managerial decision making. It involves using economic concepts and tools to help managers make better business decisions. The key areas covered in managerial economics include demand analysis and forecasting, cost analysis, production analysis, pricing decisions, profit management, capital management, and environmental scanning of the economic conditions. The goal of managerial economics is to help managers optimize business decisions and allocate scarce resources efficiently to improve profitability and growth.

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43 views18 pages

Unit 1

Managerial economics is the application of economic theory and methodology to managerial decision making. It involves using economic concepts and tools to help managers make better business decisions. The key areas covered in managerial economics include demand analysis and forecasting, cost analysis, production analysis, pricing decisions, profit management, capital management, and environmental scanning of the economic conditions. The goal of managerial economics is to help managers optimize business decisions and allocate scarce resources efficiently to improve profitability and growth.

Uploaded by

Bharti Kumari
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Managerial

Economics

Introduction
Managerial Economics is an art and science both.

It is a collaboration of two words Managerial +


Economics.
It includes planning, selecting, organizing and
controlling, which is an art of managerial activity.
It is a scientific method of utilizing the
resources(financial, human, material etc.) of the
organization which helps in growth as well as
profit maximization.
A branch of knowledge concerned with
production, consumption and transfer of wealth.

Meaning & Definition


It is an application of Economics to solving problems.
In the words of:W.W. Haynes Managerial economics is the study of the
allocation of resources available to a firm of other unit of
management among the activities of the unit.
Mc. Nair & Meriam Managerial economics consists of the use
of economic modes of thought to analyse business situation.
D.C. Hague Managerial economics a fundamental academics
subject which seeks to understand and analyse the problems of
business decision making.
Managerial economics is a tool for an organization which helps
in the allocation and utilization of available resources and
facilitate managers to take effective and efficient decisions for
the organizational problems.

Nature
Futuristic
Decision Making
Forward Planning
Problem Solving
Adjusting to uncertainty

Characteristics
Managerial Economics is micro economic in

characteristics.
It applies Theory of the firm or Economics of
firm.
It is Pragmatic.
It belongs to Normative rather than Positive
economics.
It also includes macro economics.

Scope
The scope of managerial economics covers two areas of
decision making :Operational or internal issues :- What to produce,
when to produce , how much to produce and for which
category of consumers.
Theory of demand and demand forecasting:- A firm
can survive only if it is able to cater to the demand for its
product at the right time, with the right quantity.
Pricing and competitive strategy:- Price theory helps
to explain how prices are determined under different
types of market conditions. Competitive analysis includes
the anticipation of the response of competitors to the
firms pricing, advertising and marketing strategies.

Cost analysis:-

Cost analysis deals with monetary terms also deals


with an understanding of cost concepts, cost output relationship, economies
of scale, analysis of production function and cost control. Routine cost
analysis is normally handled by firms cost accountants or industrial
engineers.

Resource allocation:-

it is concerned with the problem of


optimum allocation of scare resources. Marginal analysis is applied to the
problem of determining the level of output which maximizes profit. Linear
programming technique is used to solve optimization problems.

Profit analysis:-

Profit theory guides in the measurement and


management of profit, in calculating the pure return on capital, based future
profit planning.

Capital / Investment analysis:-

Capital is a scarce and


expensive factor of production. Capital theory can help very much in taking
investment decisions. This involves, capital budgeting, feasibility studies,
analysis of cost of capital etc..

Strategic planning :-

The firm sets certain long term goals and


objectives and selects the strategy to achieve the same. For example the
objective of the firm might be to achieve a maximum return on investment
while maintain a high level of customer service and stable work force.

Environmental or External Issues :- A

Study of economic environment should


include :The type of economics system in the country;
The general trend in production, employment,
income, prices saving and investment;
Trends in the working of financial institutions
like banks, financial corporations, insurance
companies;
Magnitude and trends in foreign trade;
Trends in labor and capital markets;
Governments economic policies, industrial
policy, monetary policy, fiscal policy, price

Scope
The scope of the managerial economics refers to its area of study.

Positive Economics concerned with what is. it is a pure science which is

not concerned with moral or ethical question.

Normative Economics is concerned with describing what should be. It


involves value judgments.

Demand Analysis and Forecasting

Cost Analysis

Production and Supply Analysis

Pricing Decisions

Profit Management

Capital Management

Inventory Management

Advertising

Concept
An abstract or general idea inferred or derived
from specific instances.
There are six basic concepts. They are:1. Incremental Concept
2. Concept of time perspective
3. Opportunity Cost Concept
4. Discounting concept
5. Equi Marginal Concept
6. Risk and Uncertainty

1. Incremental Concept
In real world business, one is concerned with not
unit change but chunk change. It emphasizes the
changes in total cost and revenue resulting from
changes in prices, products, procedures,
investments etc..
A decision is obviously profitable one if:It increases revenue more than cost.
It decreases some costs to a grater extent than it
increases others.
It increases some revenues more than it
decreases other.
It reduces costs more than revenue.

2. Concept Of Time Perspective


Marshall introduced time element in
economic theory.
Managerial economist are concerned with
short run and long run decision making.
In short period the firm can change its output
without changing its size. In the short period
the output of industry is fixed.
In the long period the firm can change its
output by changing its size. In the long period
the output of industry is slightly to be more.

3. Opportunity Cost
Concept
Funds employed in ones own business is the interest

that could be earned on those funds had they been


employed other ventures.
The time an entrepreneur devotes to his own business
is the salary he could earned by seeking employment.
Using a machine to produced one product is the
earnings for gone which would have been possible
from other products
Holding rupees five hundred as cash in hand for one
year is the ten percent rate of interest which would
have been earned had the money been kept as fixed
deposit in a bank

4. Discounting Concept
The mathematical technique for adjusting for

the time value of money and computing


present value is called discounting

5. Equi-Marginal Concept
An input should be allocated that the value added by the last unit is the same in all cases.

E.g. :- Management Institution


The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility. The

principle of equi-marginal utility explains the behavior of a consumer in distributing his limited
income among various goods and services.
This law states that how a consumer allocates his money income between various goods so as to
obtain maximum satisfaction.
Let us assume there are only three commodities available in the market, A, B and C. Also assume
that Tom has a daily income of only $15 to spend and that he can exactly order his utility preference
for each of the three products. Product A costs $1 per unit, Product B costs $3 per unit and Product C
costs $5. Note that diminishing marginal utility sets in immediately for each of the three products.
Marginal utility information is described on per $ basis, because a consumers choice are influenced
not only by the amount of additional utility that successive units give him but also how many dollars
he give up to get them.
Let us consider each dollar spent. Marginal utility per dollar shows that one dollar spend on Product A
provides the highest satisfaction of 20 utils as opposed to only 12 and 8 utils from products B and C,
respectively.
Second dollar spends again buys the highest utility of 15 utils. However, when Tom spends the third
dollar, a switch to Product B promises 15 utils of added satisfaction as opposed to 11 utils from
Product A. Following the principle, the best combination Tom can purchase with $15 would be 4 units
of A, 2 units of B and 1 unit of C. The total utility generated would be 154 utils. $4 spent on A give 54
utils of satisfaction; $6 spent on Product B gives 60 utils and $5 spent on C gives 40 utils. This gives
a total of 154 utils. No other combination will result in as high utility as this with an expenditure of
$15.
The results from the table above can be generalised to n commodities and the following condition
should hold in equilibrium:

6. Risk And Uncertainty


Risk is a situation in which the probability

distribution of a variable is known but its


actual value is not.
Uncertainty is a situation regarding a
variable in which neither its probability nor its
mode of occurrence is known.
Future is uncertain and risky. Firms may be
uncertain about production, market prices,
strategies of rival etc.
Managerial decisions are actions of today
which bear fruits in future which is

Significance in decision-making
Every manager has to take important decisions about using

his limited resources like land, capital, labour, finance, etc.


to get the maximum returns.
Microeconomics teaches how optimal decisions are made
with the assumption of full and complete information.
Managerial economics actually helps businesses to decide
whether to hire workers, build new plants or raise prices
when information is incomplete and uncertain.

Thank
You

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