Introduction To Managerial Economics

Managerial
Economics
introduction
Managerial
Economics is the application of

Economic theory & Quantitative methods
to managerial decision making process
It
is a combination of Managerial +
Economics
Meaning of Managerial
The main Managerial functions are decision
making & forward Planning
Decision making is choosing the best amongst
the alternatives available
Forward planning is planning for the future or
deciding the future course of action.
Managers use techniques like Game theory,
Econometrics, Demand forecasting, capital
budgeting etc to take various business
decisions
Meaning of Economics
Economics
deals with the optimum

utilization of scarce resources
it is the study of how human being
make choices to allocate scarce
resources to satisfy their unlimited
wants & maximize their satisfaction.
Economics is divided into Micro & Macro
Economics
Micro & Macro Economics

Micro
economics: it deals with the

behavior of individuals like Individual
consumer, producer and a market
Macro economics: it deals with the
study of Problems of an Economy as a
whole. Like Aggregate demand, supply,
national income, total employment, etc
What is Managerial Economics
What is Managerial Economics?
Managerial Economics is economics applied in decision making.

It is a special branch of economics bridging the gap between
abstract theory and managerial practice Willian Warren
Haynes, V.L. Mote, Samuel Paul
Integration of economic theory with business practice for the

purpose of facilitating decision-making and forward planning Milton H. Spencer
Managerial economics is the study of the allocation of scarce

resources available to a firm or other unit of management among
the activities of that unit
Nature of ME
1.
2.
3.
4.
Applied Economic theory : It is application of

Economics to take Decision making process.
Pragmatic : it suggests how the economic
principles are applied to formulate programs &
policies
Multi Disciplinary: Stats, Management,
Operations Research, Maths, Economics &
Psychology
Descriptive and Prescriptive: To describe
Cause & Effect Relationship; to predict the
outcomes of various managerial decisions.
Scope of ME
1.
2.
3.
4.
5.
6.
Demand analysis & Forecasting: analyses demand

to allocate required resources. By using Demand
Determinants & forecasting.
Production Function: Functional Relationship of Input
& Output. To optimally utilize resources
Cost Analysis: Functional Relationship of Cost &
Output. To determine the cost.
Inventory Management: maintain at appropriate level
Capital Budgeting: choosing the best among the
alternatives available
Profit Management: Ascertainment of Break Even
point.
Significance of
ME
Utilization of man-made & natural resources
: human have ever increasing demand so in order
to have right understanding of actual Demand &
Desires we need to apply economics
Solving Economic Problem: What to produce,
how much to produce, for whom to produce.
Use of Ideas from other subjects: Stats,
Management, Operations Research, Maths,
Economics & Psychology
Revenue to the government: Excise duty,
Level of Imports & Exports, sales tax also
increases with growth in business to firm
Social Benefits: suppliers of labour, Capital, Raw
material also get rewarded from Profit to the firm
BOOKS
Managerial
Economics by R L Varshney
& K L Maheshwari
Managerial Economics by D N Dwivedi
R.Ship with other desciplines

M.E & Economics: M.E has been described as economics
applied to decision making. Traditional economics has
two main divisions: Microeconomics &
Macroeconomics. Various Microeconomics concepts
such as:
.Elasticity of Demand
.Marginal Cost
.The short & long run returns
.Opportunity cost
.Various market forms, etc.
.Whereas Macro economics contributes in the area
of Forecasting by:
. Theory of Income
.Theory of employment
.Trade cycles,etc.
1.
M.E & Stats: Statistical methods provide the

most useful & reliable data for business
decision making. Manager can take sound
decisions only if statistically proved results
are provided. Such as:
.Theory of Probability to deal with uncertainty
in decision making
. Measures of central tendency
.Correlation
.Regression, etc
2.
3.
4.
M.E & Mathematics: ME is said to Metrical in

character, estimating various economic
relations, predicting relevant economic
quantities and using in decision making. ME
uses considerable amount of algebra,
geometry and calculus extensively in
deriving solutions
M.E & Accounting: ME and A/c are closely
related. Accounting is recording of business
transactions. A business manager needs a
lot of A/cing information data for logical
analysis in decision making and policy
formulation. New branch of Managerial
Accounting
M.E & Operations Research: OR is

application of mathematical techniques to
solve business problems. Techniques such
as Linear Programming, game theory, etc.
.There is close affiliation between ME and OR
as both have similar emphasis of cost
minimising and profit maximising
6. M.E & Psychology: Psychology provide the
basis of behavior theory of the firm. The
study of What motivates an individual to
work & study of group behaviour etc.
5.
Opportunity cost principle
It is the cost of next best alternative forgone. It is

also called alternative cost.
Example: A farmer can grow both wheat and gram
on a farm. If on one-hectare he grows only wheat
he, forgoes the production of gram. If the price of
the quantity of gram, that he forgoes is Rs.1000.
then the opportunity cost of growing wheat will be
Rs.1000. Thus, the price of gram which the farmer
has forego in order to produce wheat is called the
opportunity cost of wheat.
In the similar way, the opportunity cost to a firm
using resources in the production of a good is the
revenue foregone by not using these resources in
their next best alternative use.
Production possibility
curve
It
is the graphical representation of all

combinations of two goods that can be
produced in an economy, with given
resources & technology.
It is based on the fact that, if an
economy wants to produce extra unit of
one good it will surely have to sacrifice
the production of the other good by
some units.
Production possibility
curve
Assumptions:
1.
2.
3.
4.
5.
An economy can produce only two

goods from available resources
Full employment of resources are
assumed
Time is given and constant
Factors of production are constant
Technology is given and constant
Production possibility schedule

Production
Possibility
Number of
Mobile (in
Lakhs)
Number of
Tablets (in
Lakhs)
80
20
60
40
40
60
20
80
Incremental Principle
Incremental concept involves estimating the impact of

decision alternatives on costs and revenue,
emphasizing the changes in total cost and total
revenue resulting from changes in prices, products,
procedures, investments or whatever may be at stake
in the decisions.
Incremental cost is the change in total cost as result
of a particular decision
Whereas, Incremental revenue is the change in
total revenue as result of a particular decision.
For example: A company decides to launch a website
to sell products online the cost incurred to launch the
website will be Incremental cost and the revenue
generated from selling through website would be
Incremental revenue.
The
incremental principle may be stated as

under:
A decision is obviously a profitable one if
It increases revenue more than costs
It decreases some costs than it increases

other costs
It increases some revenues more than it

decreases revenue of other products.
It reduces cost more than it decreases

revenues.
MARGINALISM
Marginalism
or Margin Analysis is the

study of variables in terms of effect that
would occur if they were changed by a
small amount.
Its types are:
1.Marginal Revenue :
Change in TR with one
extra unit sold
2.Marginal Cost :
Change in TC with one
extra unit produced
3.Marginal Profit :
Change in TP with one
unit change in output
4.Marginal Product :
Change in TP with one
change in factor of
production
Difference b/w Marginalism

and Incrementalism
For
Example = 50 laborers combine can

produce 100 tonnes.
Marginalism is: If with addition of 1
labour the production goes to 102 tonnes
or increases by 2 tonnes.
Incremaentalism is: In a situtation if we
add 10 more labourers to the crew of 50
the production goes to 110 tonnes or
increases by 10 tonnes
Difference b/w Marginalism

and Incrementalism
Margin
deals with per unit change

whereas Increment deals with bulk
changes
Incremental concepts are flexible than
margin as it considers other variables
also.
Law of Diminishing Marginal

Utility
As a consumer consumes more and more
units of a specific commodity the utility from
the successive units goes on diminishing
Mr. H Gossen was first to explain this law in
1854.
Alfred Marshall later stated this law as: the
additional benefit which a person derives from
an increase of his stock of things diminishes
with every increase in stock that already has.
Law of DMU
Based
1.
2.
3.
4.
5.
upon few assumptions:

All units of given commodity are
homogeneous
The consumption is continuous without lag.
Only one type of commodity is used for
consumption at a time.
The utility can be measured in cardinal
units
The consumer is rational
Law of DMU
Units
Marginal Utility
10
-2
Exceptions of Law of Demand

Desire
for Money
Hobbies
Drunkards
Desire for knowledge
Fashion
Law of Equi-Marginal
utility
"A
person can get maximum utility with his

given income when it is spent on different
commodities in such a way that the
marginal utility of money spent on each
item is equal".
It
is clear that consumer can get maximum

utility from the expenditure of his limited
income. He should purchase such amount
of each commodity that the last unit of
money spend on each item provides same
marginal utility.
Assumptions:
There
is no change in the prices of the goods.

The income of consumer is fixed.
The marginal utility of money is constant.
Consumer has perfect knowledge of utility
obtained from goods.
Consumer is normal person so he tries to seek
maximum satisfaction.
The utility is measurable in cardinal terms.
Consumer has many wants.
The goods have substitutes.
Explanation:
Suppose a consumer has Rs.60 to spend on apples and
bananas. So the different utility from different units
consumed will be:
Unit
MU (Apples)
MU (Bananas)
10
The
above schedule shows that consumer

can spend sixty Rupees in different ways:
Rs.10 on Apples and Rs.50 on bananas.
TU=[(10) + (8+7+6+5+4)] = 40.
Rs.20 on apples and Rs.40 on bananas.
TU=[(10+9) + (8+7+6+5)] = 45.
TU=[(10+9+8) + (8+7+6)] = 48.
TU= [(10+9+8+7) + (8+7)] = 49.
TU= [(10+9+8+7+6) + (8)] = 48.
EXCEPTIONS
DOES
NOT ALLPLICABLE ON FASHION

NOT HOLD WELL IN CASE OF VERY LOW
INCOME
IGNORANCE

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Managerial

Economics is the application of

deals with the optimum

Micro & Macro Economics

economics: it deals with the

What is Managerial Economics

What is Managerial Economics?

Managerial Economics is economics applied in decision making.

Integration of economic theory with business practice for the

Managerial economics is the study of the allocation of scarce

Applied Economic theory : It is application of

Demand analysis & Forecasting: analyses demand

R.Ship with other desciplines

M.E & Stats: Statistical methods provide the

M.E & Mathematics: ME is said to Metrical in

M.E & Operations Research: OR is

Opportunity cost principle

It is the cost of next best alternative forgone. It is

is the graphical representation of all

An economy can produce only two

Production possibility schedule

Incremental concept involves estimating the impact of

incremental principle may be stated as

It increases revenue more than costs

It decreases some costs than it increases

It increases some revenues more than it

It reduces cost more than it decreases

or Margin Analysis is the

Difference b/w Marginalism

Example = 50 laborers combine can

Difference b/w Marginalism

deals with per unit change

Law of Diminishing Marginal

upon few assumptions:

Exceptions of Law of Demand

person can get maximum utility with his

is clear that consumer can get maximum

is no change in the prices of the goods.

above schedule shows that consumer

NOT ALLPLICABLE ON FASHION

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