MANAGERIAL

ECONOMICS
DO YOU KNOW ECONOMICS?

Why is Economics Important?

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 INTRODUCTION TO ECONOMICS

The Word Economics is the

Economics science that
comes from studies human
the Greek behaviour as a
Word relationship
Oikos meaning between ends
Home and scarce means
Nomos which have
meaning alternative uses.
Management
 INTRODUCTION TO ECONOMICS

SCOPE OF ECONOMICS POSITIVE AND NORMATIVE ECONOMICS

Field of study: Science or art; positive or
normative science Positive Economics: Objective analysis,
Fundamental Questions: cause-and-effect relationships, value-
● What to produce? neutral
Allocation of resources for goods and Normative Economics: Value judgments,
services policy recommendations, ethical
● How to produce? principles
Organizing resources for efficiency
● Whom to produce for?
Distribution of goods and services
MANAGERIAL ECONOMICS - DEFINITION
•According to E.F. Brigham and J. L. Pappar, Managerial Economics is
“The application of economic theory and methodology to business
administration practice.”

•Christopher Savage and John R. Small: “Managerial Economics is

concerned with business efficiency”.
MANAGERIAL ECONOMICS
•Mana­gerial economics as a subject gained popularity in the USA after the
publication of the book “Managerial Economics” by Joel Dean in 1951.
•An amalgamation of economic theory with business practices so as to
ease decision ­making and future planning by management.
• Assists the managers of a firm in a rational solution of obstacles faced in the
firm’s activities.
• It makes use of economic theory and concepts.
• It helps in formulating logical managerial decisions.
• The key of Managerial Economics is the micro­economic theory of the firm.
• It lessens the gap between economics in theory and economics in practice.
NATURE OF MANAGERIAL ECONOMICS
NATURE OF MANAGERIAL ECONOMICS

•Managers study managerial economics because it gives them insight

to reign the functioning of the organisation.

•If manager uses the principles applicable to economic behaviour

reasonably, then it will result in smooth functioning of the
organisation.
IMPORTANCE OF MANAGERIAL ECONOMICS
Answers the questions:
• What products and services should be produced?
• What input and production technique should be used?
• How much output should be produced and at what prices it should be
sold?
• What are the best sizes and locations of new plants?
• When should equipment be replaced?
• How should the available capital be allocated?
SCOPE OF MANAGERIAL ECONOMICS
•Managerial economics provides management with strategic planning
tools that can be used to get a clear perspective of the way the
business world works and what can be done to maintain profitability
in an ever-changing environment.
•Managerial economics refers to those aspects of economic theory
and application which are directly relevant to the practice of manage­
ment and the decision-making process within the enterprise.
SCOPE OF MANAGERIAL ECONOMICS
ROLE OF MANAGERIAL ECONOMICS IN BUSINESS
DECISION
Decision making – a process

Decision - product

Purpose of decision making - to

direct human behaviour and effort
towards a future goal or objective
Managerial Economics Helps With Decision-making
•Market analysis
• Managerial economists study consumer behavior, market trends, and competition to help
managers understand the market.
•Cost management
• Managerial economists analyze and manage costs to identify opportunities for cost savings.
•Pricing
• Managerial economics helps managers determine pricing strategies.
•Risk analysis
• Managerial economics helps managers evaluate risks and minimize uncertainty.
•Profit management
• Managerial economics helps managers manage profits and maximize profitability.
 Managerial Economics Helps With Decision-making
•Capital management
• Managerial economics helps managers manage capital to sustain operations and grow the business.
•Environmental scanning
• Managerial economics helps managers analyze external forces such as market trends, economic
conditions, and the competitive landscape.
•SWOT analysis
• Managerial economics helps managers conduct SWOT analysis, which is a critical part of strategic
planning.
•Game theory
• Managerial economics uses game theory to study competitive interactions and predict competitor
actions.

Managerial economics also helps managers understand the impact of macroeconomic

factors, such as inflation, interest rates, and government policies, on their organizations.
ROLE OF MANAGERIAL ECONOMIST
•Studies the economic patterns at macro-level and analysis it’s significance to the firm.
•Consistently examines the probabilities of transforming an ever-changing economic environment
into profitable business avenues.
•Assists the business planning process of a firm.
•Carries out the cost-benefit analysis for the firm.
•Assists the management in the decisions pertaining to internal functioning of a firm
(changes in price, investment plans, type of goods/services to be produced, inputs to be used, techniques of
production to be employed, expansion/ contraction of firm, allocation of capital, location of new plants,
quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting,
etc.)

•Analyzes changes in macro- economic indicators

(national income, population, business cycles, and their possible effect on the firm’s functioning.)
PRINCIPLES OF MANAGERIAL ECONOMICS
•Marginal Principle
•Incremental Principle
•Equi-marginal Principle
•Time Perspective Principle
•Opportunity Cost Principle
•Discounting Principle
Marginal Principle
•A decision is said to be rational and sound if
- the firm’s objective of profit maximization leads to increase in profit, which is in either of two
scenarios:
• If total revenue increases more than total cost.
• If total revenue declines less than total cost.

•Marginal analysis - examines the impact of a unit change in one variable on

the other.
• Marginal revenue- change in total revenue per unit change in output sold.
• Marginal cost- change in total costs per unit change in output produced.

•The decision of a firm to change the price would depend upon the resulting impact/change in
marginal revenue and marginal cost.
•If the marginal revenue is greater than the marginal cost, then the firm should bring about the
change in price.
Incremental Principle
•While marginal analysis is generated by change in outputs and inputs, the incremental analysis is
generated by the change in the firm's performance for a given managerial decision.
•It is generalization of marginal concept -refers to changes in cost and revenue due to a policy
change.
◦ For example - adding a new business, buying new inputs, processing products, etc.

•Change in output due to change in process, product or investment is considered as incremental

change.
•A decision is profitable:
◦ If revenue increases more than costs;
◦ If costs reduce more than revenues;
◦ If increase in some revenues is more than decrease in others; and
◦ If decrease in some costs is greater than increase in others.
Equi-marginal Principle
•The laws of equi-marginal utility states that a consumer will reach the stage of equilibrium when the
marginal utilities of various commodities he consumes are equal.
•A consumer will spend his money-income on different goods in such a way that the marginal utility of
each good is proportional to its price, i.e.,
• MUx/Px = MUy/Py = MUz/Pz
Where, MU represents marginal utility and P is the price of good.

•Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of
production which satisfies the following condition:
• MRP1/MC1 = MRP2/MC2 = MRP3/MC3
• Where, MRP is marginal revenue product of inputs and MC represents marginal cost.

•Thus, a manger can make rational decision by allocating/hiring resources in a manner which equalizes
the ratio of marginal returns and marginal costs of various use of resources in a specific use.
Opportunity Cost Principle
•By opportunity cost of a decision refers to the sacrifice of alternatives required
by that decision. If there are no sacrifices, there is no cost.
•A firm can hire a factor of production if and only if that factor earns a reward in
that production activity which is equal to or greater than its opportunity cost.
•Opportunity cost is the minimum price that would be necessary to retain a
factor-service in it’s given use.
•Also defined as the cost of sacrificed alternatives.
Time Perspective Principle
•A manger/decision maker should give due emphasis, both to short-term and long-term impact of his
decisions, giving appropriate significance to the different time periods before reaching any decision.
•Short-run time period
• Some factors are fixed while others are variable.
• The production can be increased by increasing the quantity of variable factors.

•Long-run time period

• All factors of production can become variable.
• Entry and exit of seller firms can take place easily.

•From consumers point of view:

• Short-run refers to a period in which they respond to the changes in price, given the taste and preferences of
the consumers.
• Long-run is a time period in which the consumers have enough time to respond to price changes by varying
their tastes and preferences.
 Discounting Principle
•According to this principle, if a decision affects costs and revenues in long-run, all
those costs and revenues must be discounted to present values before valid
comparison of alternatives is possible.
•This is essential because a rupee worth of money at a future date is not worth a
rupee today - Money actually has time value.
•Discounting - a process used to transform future rupee into an equivalent number of
present rupee.
• For instance, INR 1 invested today at 10% interest is equivalent to INR 1.10 next year.

•FV = PV*(1+r)t
• Where, FV is the future value (time at some future time), PV is the present value (value at t0, r is the discount
(interest) rate, and t is the time between the future value and present value.